UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K10-K/A

(Amendment No. 1)

 


(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20062015

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number 1-13165

 


CRYOLIFE, INC.

(Exact name of registrant as specified in its charter)

 


 

Florida 59-2417093

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1655 Roberts Boulevard N.W., Kennesaw, GA 30144

(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code (770) 419-3355

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange

on which registered

Common Stock $.01 par value

Preferred Share Purchase Rights

6% Convertible Preferred Stock, $.01 par value

 

New York Stock Exchange

New York Stock Exchange

New York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act:

None

Indicated

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicated

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K Section 229.405 of this chapter is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a nonaccelerated filer.smaller reporting company. See definitiondefinitions of “accelerated filer and large“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange ActAct. (Check one).

Large Accelerated Filer  ¨    Accelerated Filer  x    Non-accelerated Filer  ¨

Large accelerated filer¨Accelerated filerx
Non-accelerated filer¨Smaller reporting company¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of June 30, 2006,2015, the aggregate market value of the voting stock of the Registrant held by non-affiliates of the registrant was $120,532,000,$285,707,713 computed using the closing price of $5.40$11.28 per share of Common Stock on June 30, 2006,2015, the last trading day of the registrant’s most recently completed second fiscal quarter, as reported by the New York Stock Exchange, based on management’s belief that Registrant has no affiliates other than its directors and executive officers.

As of February 16, 200711, 2016, the number of outstanding shares of Common Stock of the registrant was 24,988,465.32,575,228.

Documents Incorporated By Reference

DOCUMENTS INCORPORATED BY REFERENCE

None.


TABLE OF CONTENTS

 

DocumentParts Into Which Incorporated
Proxy Statement for the Annual Meeting of ShareholdersPart III
to be filed within 120 days after December 31, 2006.



PART I

Item 1.Business.

Overview

CryoLife, Inc. (“CryoLife”, the “Company”, “we”, or “us”), incorporated January 19, 1984 in Florida, develops and commercializes biomaterials, implantable medical devices, and preserves and distributes human tissues for cardiovascular and vascular transplant applications. The Company’s biomaterials and implantable devices include BioGlue® Surgical Adhesive (“BioGlue”), porcine heart valves, and vascular grafts of bovine tissue processed using the Company’s proprietary SynerGraft® technology. The Company’s products are often marketed internationally several years before they can be marketed in the U.S. In 2006 international revenues were 15% of total revenues.

BioGlue

CryoLife’s proprietary product BioGlue, designed for cardiovascular, vascular, pulmonary, and general surgical applications, is a polymer based on bovine blood protein and an agent for cross-linking proteins. CryoLife is authorized to distribute BioGlue throughout the U.S. and in more than 60 other countries for designated applications. In the U.S. BioGlue is U.S. Food and Drug Administration (“FDA”) approved as an adjunct to sutures and staples for use in adult patients in open surgical repair of large vessels. CryoLife distributes BioGlue under Conformité Européene (“CE”) Mark product certification in the European Economic Area (“EEA”) for soft tissue repair procedures (which include cardiovascular, pulmonary, and additional soft tissue repair procedures). CryoLife has also received approval and distributes BioGlue for soft tissue repairs in Canada. Additional marketing approvals have been granted for specified applications in Australia, and several other countries in Central and South America, and Asia.

Human Tissue Preservation and Distribution

CryoLife distributes preserved human cardiovascular, vascular, and orthopaedic tissue to implanting institutions throughout the U.S., Canada, and Europe, although distribution of orthopaedic tissue is being phased out. See “—Recent Events—Exchange and Service Agreement with RTI”. CryoLife preserves human tissue using special freezing techniques, or cryopreservation. Management believes the human tissues it distributes offer specific advantages over mechanical, synthetic, and animal-derived alternatives. Depending on the alternative, these advantages include more natural blood flow properties for its cryopreserved human heart valves, the elimination of a long-term need for drug therapy to prevent excessive blood clotting, and a reduced risk of catastrophic failure, thromboembolism (stroke), or calcification.

Other Products

CryoLife distributes a porcine heart valve, the CryoLife O’Brien® aortic heart valve in Europe, the Middle East, and Africa (“EMEA”). This valve contains minimal amounts of synthetic material compared to other glutaraldehyde-fixed porcine valves. This decreases the risk of endocarditis, a debilitating and potentially fatal infection. CryoLife also markets its SynerGraft bovine vascular graft, the SynerGraft Model 100, in the EMEA. This bovine vascular graft utilizes CryoLife’s SynerGraft process, a proprietary process that involves the depopulation of cells leaving a matrix of protein fibers that has the potential to be repopulated with the recipient’s cells. CryoLife believes that this process increases graft longevity, and improves the biocompatibility and functionality of the tissue.

In 2007 CryoLife will begin exclusive distribution of CardioWrap® a product of MAST BioSurgery, Inc. CardioWrap is a bioresorbable thin film sheet used to replace the pericardium in cardiac reconstruction and other cardiac surgeries where the patient may face re-operation within six months.

Research and Development

Through its continuing research and development activities, CryoLife endeavors to use its expertise in protein chemistry, biochemistry, and cell biology, and its understanding of the cardiovascular and vascular surgery medical specialties, to acquire and develop useful implantable products and technologies. CryoLife seeks to identify market areas that can benefit from preserved living tissues and other related technologies, to develop innovative techniques and products within these areas, to secure their commercial protection, to establish their efficacy, and then to market these techniques and products. In order

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to expand CryoLife’s service and product offerings, the Company is in the process of developing or investigating several technologies and products. The products in development have not been subject to completed clinical trials and have not received FDA or other regulatory approval, so CryoLife may not derive any revenues from them. CryoLife generally performs significant research and development work before offering its services and products, building on either existing proprietary and non-proprietary knowledge or acquired technology and know-how. The Company’s current tissue preservation services were developed internally. The Company developed its BioGlue product from a substance originally developed by a third party and acquired by CryoLife. In addition the Company continues to explore technologies that may further enhance the safety of its tissue processing.

BioGlue is the first product to be developed from the Company’s Protein Hydrogel Technology (“PHT”). CryoLife’s PHT is the base for several potential products in development. CryoLife is researching the use of derivatives of the PHT technology as a potential nucleus pulposus replacement in spinal disc repair and for use in trauma surgery. Potential product line extensions include modifications to the BioGlue delivery system.

Risk Factors

CryoLife’s business is subject to a number of risks, including the possibility of FDA actions, additional expenses and losses from product recalls, possible losses from product liability, securities, and other litigation, other regulatory actions, adverse publicity, and lower demand for CryoLife products resulting from product recalls and other FDA activity, inability to obtain sufficient insurance coverage, possible inability to protect the intellectual property rights in the Company’s technology, the possible inability to obtain necessary regulatory approvals, and possible future lack of capital. See Part I, Item 1A, “Risk Factors” below.

Recent Events

Additional Regulatory Approvals

On December 11, 2006 the Company announced that it has received 510(k) clearance from the FDA for its ProPatch Soft Tissue Repair Matrix (“ProPatch”). ProPatch, developed from bovine pericardial tissue, is used to reinforce weakened soft tissues and provides a resorbable scaffold that is replaced by the patient’s own soft tissue.

On December 13, 2006 the Company announced that it has received CE Mark and Health Canada approval for a new rigid applicator tip for its BioGlue Surgical Adhesive. The new tip, designed to reach beyond 27 cm, enables precise delivery of BioGlue over an extended length.

Agreement with BioForm Medical, Inc.

In October 2006 the Company announced that it has signed a licensing and distribution agreement with BioForm Medical, Inc. (“BioForm”) for the development and commercialization of BioGlue for use in cosmetic and plastic surgery indications. The agreement calls for BioForm to fund the clinical development and regulatory approval process for commercializing BioGlue for use in cosmetic and plastic surgery indications in the United States, Canada, and various countries in Europe. In addition, BioForm will oversee all aspects of the marketing, sales and distribution of BioGlue in the United States, Canada, and various countries in Europe for these indications. CryoLife will remain the exclusive supplier of BioGlue for all applications. Under the terms of the agreement, CryoLife received an initial fee from BioForm, and will receive a milestone payment upon the first FDA approval for use in cosmetic and plastic surgery indications.

Exchange and Service Agreement with RTI

On December 19, 2006 the Company announced that it had entered into an exchange and service agreement with Regeneration Technologies, Inc., and certain of its affiliates (collectively, “RTI”), respecting procurement, processing, and distribution activities for cardiovascular and vascular tissue processed and distributed by RTI and orthopaedic tissue for the knee processed and distributed by CryoLife (the “RTI Agreement”). According to the RTI Agreement, CryoLife ceased accepting for processing donated human orthopaedic tissue commencing January 1, 2007 and will work to transition existing arrangements for recovery of human orthopaedic tissue to RTI. Likewise, on January 1, 2007 RTI ceased accepting donated human cardiovascular and vascular tissues for processing and will work to transition its arrangements for recovery of these tissues to CryoLife. Certain physical assets relating to the tissues that are the subject of the agreement may also be transferred between the parties. No cash was exchanged in the transaction. CryoLife will continue to distribute its existing orthopaedic

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tissue inventory, and RTI will continue to distribute its existing cardiovascular and vascular tissue inventory, through June 30, 2008. After that date CryoLife will become entitled to distribute RTI’s remaining cardiovascular and vascular tissue inventory, and RTI will become entitled to distribute CryoLife’s remaining orthopaedic tissue inventory, for a fee. Under the RTI Agreement, from July 1, 2008 through December 31, 2016, except as set forth above, CryoLife has agreed not to market or solicit orders for certain human orthopaedic tissues and RTI has agreed not to market or solicit orders for human cardiac and vascular tissues. The agreement also provides for a non-exclusive license of technology from CryoLife to RTI, and contains customary provisions regarding indemnification and confidentiality. See discussions on the financial impact of this transaction in Part II, Item 8, “Note 3 of the Notes to Consolidated Financial Statements”.

Agreement with the Cleveland Clinic to Develop Aortic Mitral Allograft

On January 10, 2007 the Company announced that it has entered into an agreement with the Cleveland Clinic to develop an innovative allograft, or human tissue, heart valve for patients suffering from serious heart infections. Under the terms of the agreement, the Company will work with the Cleveland Clinic to develop a combination aortic-mitral allograft heart valve to be used in patients with infective endocarditis, a condition in which the structures of the heart, particularly the heart valves, are infected.

CardioWrap Distribution Agreement

On January 17, 2007 the Company announced that it has signed a multi-year agreement with MAST Biosurgery, Inc. to distribute CardioWrap, a bioresorbable thin film sheet used to replace the pericardium in cardiac reconstruction and other cardiac surgeries in which the patient may face re-operation within six months. The agreement gives CryoLife the exclusive rights to distribute CardioWrap in the U.S. for three years. CardioWrap is made from polylactic acid, a polymer composed of lactic acid, similar to that which occurs naturally in the human body. CardioWrap maintains its strength during the healing process while slowly breaking down into lactic acid molecules. These molecules are ultimately metabolized into carbon dioxide and water and released from the body through the lungs. Available in several sizes and thicknesses, sheets of CardioWrap can be cut or shaped with scissors to the desired size, allowing CardioWrap to conform to most anatomical needs.

FDA Order on Human Tissue Preservation and Other FDA Correspondence and Notices

FDA Order on Human Tissue Preservation

On August 13, 2002 the Company received an order from the Atlanta district office of the FDA regarding the non-valved cardiac, vascular, and orthopaedic tissues processed by the Company since October 3, 2001 (the “FDA Order”). Pursuant to the FDA Order, the Company placed non-valved cardiac, vascular, and orthopaedic tissue subject to the FDA Order (i.e. processed since October 3, 2001) on quality assurance quarantine and recalled the portion of those tissues that had been distributed but not implanted. In addition the Company ceased processing non-valved cardiac, vascular, and orthopaedic tissues.

The FDA allowed non-valved cardiac and vascular tissues covered by the recall to be distributed beginning in late September 2002, subject to specified conditions. The Company changed its processing procedures and took other actions intended to address the FDA’s concerns, and now processes non-valved cardiac and vascular tissues. The Company processed orthopaedic tissues through December 31, 2006 when it ceased processing orthopaedic tissues pursuant to the RTI Agreement discussed above in “—Recent Events”.

See Part I, Item 3, “Legal Proceedings” for a discussion of certain material legal proceedings relating to the FDA Order and other matters.

Other FDA Correspondence and Notices

July 2005 483

An FDA Form 483 Notice of Observations (“483”) was issued in August 2005 in connection with the FDA inspections of the Company’s facilities in July 2005 (“July 2005 483”). The Company responded to the July 2005 483 in August 2005, in September 2005, and in October 2005. In April 2006 the FDA responded on the adequacy of the Company’s responses. The Company responded to the FDA in June 2006. In response to the July 2005 483 the Company has implemented new systems and procedures and revised existing systems and procedures. The FDA may require the Company to implement additional corrective actions, perform additional validation testing, or supply additional information related to the inspections, and has the authority to take other actions, which may be more burdensome. The Company has cooperated and will continue to cooperate with the FDA to review process improvements and address any outstanding observations.

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SynerGraft

On February 20, 2003 the Company received a letter from the FDA stating that a 510(k) premarket notification should be filed for the Company’s SynerGraft processed human cardiac tissues (“CryoValve® SG”) and that premarket approval marketing authorization should be obtained for the Company’s SynerGraft processed human vascular tissues (“CryoVein® SG”) when marketed or labeled as an arteriovenous (“A-V”) access graft. The agency’s position is that use of the SynerGraft technology in the processing of allograft heart valves represents a modification to the Company’s legally marketed CryoValve allograft and that vascular allografts labeled for use as A-V access grafts are medical devices that require premarket approval.

On November 3, 2003 the Company filed a 510(k) premarket notification with the FDA for the CryoValve SG. On February 4, 2004 the Company received a letter from the FDA requesting additional information. On August 24, 2004 the Company submitted an amendment to its original 510(k) submission providing clarification and additional information. The FDA requested further additional information in November 2004. On June 8, 2005 CryoLife responded to some of these additional requests. CryoLife also has initiated an appeal of other requests through administrative procedures. The FDA requested further additional information in January 2006. Since March 2006 the Company has had discussions with the FDA to address the outstanding requests for additional information and seek clearance for the CryoValve SG pulmonary valve. On July 21, 2006 the Company submitted an amendment to its 510(k) application addressing information requested by the FDA. The Company has undertaken further clinical and preclinical evaluations in response to requests by the FDA. These evaluations were submitted to the FDA in an additional 510(k) amendment on February 20, 2007. The FDA may still require that additional studies be undertaken. Clearance of the 510(k) premarket notification with the FDA will be required before the Company can resume distribution of SynerGraft processed CryoValve SG.

On December 8, 2003 the Company received a letter from the FDA stating that it was the agency’s position that certain additional cardiovascular tissues processed with the SynerGraft technology should be regulated as medical devices. On September 14, 2004 the Company met with the FDA to discuss the data to be used to support a formal Request for Designation (“RFD”) filing for SynerGraft processed non-valved cardiac and vascular tissue, including the CryoVein SG. An RFD submission establishes the regulatory status of the tissue. The Company submitted the RFD on October 5, 2004. The FDA affirmed its original decision in letters received in December 2004. That decision was subject to an administrative appeal. On October 20, 2005 CryoLife was informed that the FDA had denied the appeal and that CryoLife will be unable to distribute CryoVein tissues with the SynerGraft technology until further submissions and FDA approvals are granted. The Company is evaluating whether it will file and seek FDA approvals for CryoVein SG or discontinue the CryoVein SG.

As a result of these FDA communications, in 2003 the Company suspended the use of the SynerGraft technology in the processing of allograft tissue and the distribution of tissues on hand previously processed with the SynerGraft technology until the regulatory issues associated with these tissues are resolved. Additionally, the Company discontinued labeling its vascular grafts for use as A-V access grafts. Until such time as the issues surrounding SynerGraft are resolved, the Company is employing its traditional processing methods on these tissues. As of December 31, 2006 the Company had no deferred preservation costs related to SynerGraft processed tissues on its Consolidated Balance Sheets.

Strategy

On January 18, 2006 the Company announced it had engaged Piper Jaffray & Co. to assist the Company’s management and Board of Directors in identifying and evaluating potential strategies to enhance shareholder value. On November 2, 2006, the Company announced that in connection with its strategic analysis, the Board determined that shareholder value was not likely to be maximized through a sale of the Company, or of a major product line, at that time. Further, the Board concluded that the significant improvements in the Company’s operating results in the second and third quarters of 2006, coupled with improvements in the Company’s liquidity, made it unnecessary for the Company to pursue a capital-raising transaction at that time. The Company announced that it would continue to focus on growing its business and leveraging its strengths and expertise in its core marketplaces to generate revenue and earnings growth. The key elements of its strategy related to growing its business and leveraging its strengths and expertise in its core marketplaces to generate revenue and earnings growth are:

Expand Distribution of BioGlue and Develop Derivative Products. The Company intends to increase the market penetration of its BioGlue by (i) expanding awareness of the clinical advantages of BioGlue through continuing educational and marketing efforts directed to physicians, (ii) pursuing additional indications or product line extensions for the BioGlue technology in either the U.S. or internationally, (iii) pursuing indications for derivatives of the BioGlue technology in either the U.S. or internationally, and (iv) continuing to seek additional marketing approvals in other countries.

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Expand Distribution of Preserved Human Tissue. The Company intends to increase the market penetration of its CryoLife preserved human heart valves, non-valved conduits, and vascular grafts by (i) increasing yields of implantable tissue per donor, (ii) expanding awareness of clinical advantages of preserved human tissues through continuing educational efforts directed to physicians and tissue procurement agencies, (iii) improving and expanding its relationships with the approximately 80 tissue banks and organ procurement agencies across the U.S. which have recovered and sent tissue to the Company for preservation, (iv) increasing the number of tissue banks and organ procurement agencies that work with CryoLife, (v) expanding its physician training activities, and (vi) resuming the application of its SynerGraft technology to human heart valves, non-valved conduits, and vascular grafts, if required FDA approvals are obtained. In an effort to increase its market penetration of CryoLife preserved human heart valves, non-valved conduits, and vascular grafts the Company entered into the RTI Agreement in December 2006 in order to increase cardiovascular and vascular procurement and market share for these tissues.

Broaden Application of Preservation Services.The Company will continue to collect, monitor, and evaluate implant data to (i) develop expanded uses for the human tissues currently cryopreserved by the Company and (ii) identify new human tissues as candidates for cryopreservation.

Additionally, the Company announced that it will pursue three additional key strategies designed to generate revenue and earnings growth. These three strategies include:

Identify and evaluate acquisition opportunities of complementary product lines and companies.The Company intends (i) to leverage its current distribution channel and its expertise in the cardiovascular and vascular medical specialties by selectively pursuing the potential acquisition, distribution or licensing of additional technologies that complement existing services and products, and (ii) to attempt to leverage its current technology platform, including its protein hydrogel technology and its SynerGraft technology, into medical specialties other than cardiovascular and vascular surgery by selectively pursuing the potential acquisition, distribution or licensing of additional technologies. As a part of this strategy, in January 2007 the Company signed a three-year agreement to exclusively distribute CardioWrap, a bioresorbable thin film sheet used to replace the pericardium in cardiac reconstruction and other cardiac surgeries where the patient may face re-operation within six months.

License Company technology to third parties for non-competing uses.The Company intends to increase the market penetration of its BioGlue by (i) pursuing through strategic alliances additional indications or product line extensions for the BioGlue technology in either the U.S. or internationally, and (ii) pursuing through strategic alliances indications for derivatives of the BioGlue technology in either the U.S. or internationally. The Company will consider licensing opportunities for other existing products or for products in its research and development pipeline if the Company determines that licensing opportunities could enhance shareholder value. As part of this strategy, in October 2006 the Company signed a licensing and distribution agreement with BioForm for the development and commercialization of BioGlue for use in cosmetic and plastic surgery indications. The agreement calls for BioForm to fund the clinical development and regulatory approval process for commercializing BioGlue for use in cosmetic and plastic surgery indications in the United States, Canada, and various countries in Europe.

Analyze and identify underperforming assets for potential sale or disposal. The Company intends to analyze and identify underperforming assets not complementary to the strategies identified above for potential sale or disposal. As a part of this strategy, the Company entered into the RTI Agreement in which the Company ceased processing orthopaedic tissues on January 1, 2007 in exchange for a non-compete agreement from RTI for cardiovascular and vascular tissues and the potential to receive additional cardiovascular and vascular procurement, which was previously being received by RTI.

Products and Services

Implantable Biomaterials for Use as Surgical Adhesives and Sealants

The effective closure of internal wounds following surgical procedures is critical to the restoration of the function of tissue and to the ultimate success of the surgical procedure. Failure to effectively seal surgical wounds can result in leakage of air in lung surgeries, cerebral spinal fluids in neurosurgeries, blood in cardiovascular surgeries, and gastrointestinal contents in abdominal surgeries. Air and fluid leaks resulting from surgical procedures can lead to significant post-operative morbidity resulting in prolonged hospitalization, higher levels of post-operative pain, and a higher mortality rate.

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Sutures and staples facilitate healing by joining wound edges and allowing the body to heal naturally. However, because sutures and staples do not have inherent sealing capabilities, they cannot consistently eliminate air and fluid leakage at the wound site. This is particularly the case when sutures and staples are used to close tissues containing air or fluids under pressure, such as the lobes of the lung, the dural membrane surrounding the brain and spinal cord, blood vessels, and the gastrointestinal tract. In addition, in minimally invasive surgical procedures where the physician must operate through small access devices, it can be difficult and time consuming for the physician to apply sutures and staples. The Company believes that the use of surgical adhesives and sealants with or without sutures and staples could enhance the efficacy of these procedures through more effective and rapid wound closure.

In order to address the inherent limitations of sutures and staples, the Company developed and commercialized its BioGlue product. BioGlue is a polymeric surgical adhesive based on bovine blood protein and a cross-linking agent. BioGlue has a tensile strength that is four to five times that of fibrin sealants. Worldwide clinical applications for BioGlue include cardiovascular, vascular, pulmonary, and soft tissue repair.

BioGlue is the first product to be developed from the Company’s Protein Hydrogel Technology. PHT is based on a bovine protein that mirrors an array of amino acids that perform complex functions in the human body. Together with glutaraldehyde, the protein forms a hydrogel, a water based biomaterial in some ways similar to human tissue. Materials and implantable replacement devices created with PHT may have the potential to provide structure, form, and function similar to certain human body tissue. The Company is conducting a clinical trial for BioDisc to determine its clinical utility as a nucleus pulposus replacement in spinal disc repair. The Company is conducting preclinical research with BioFoam® for use in wound sealing in trauma surgery.

The Company estimates that aggregate U.S. sales for surgical adhesives and glues was approximately $250 million in 2006. CryoLife is authorized to distribute BioGlue throughout the U.S. and more than 60 other countries for designated applications. In the U.S. BioGlue is FDA approved as an adjunct to sutures and staples for use in adult patients in open surgical repair of large vessels. CryoLife distributes BioGlue under CE Mark product certification in the EEA for soft tissue repair procedures (which include cardiovascular, pulmonary, and additional soft tissue repair procedures). CryoLife has also received approval and distributes BioGlue for soft tissue repairs in Canada. Additional marketing approvals have been granted for specified applications in Australia, and several other countries in Central and South America and Asia. In mid-2004 the Company introduced the 2 ml and the 5 ml syringe delivery system, which provides BioGlue without a separate delivery system. The 10 ml version of the syringe delivery system was approved by the FDA and CE Marked for distribution in late 2005 and approved by Canada in February 2006. Prior to the release of the syringe delivery system, BioGlue was only available for use with a two-part applicator system. The syringe spreader tip, which allows for a wider application of BioGlue, was added to the BioGlue CE Mark approval in May 2005, received Canadian approval in April 2005, and received FDA approval in January 2006. The rigid applicator tip, designed to reach beyond 27 cm, received Canadian and CE Mark approvals in November and December 2006, respectively. Revenues from BioGlue represented 49%, 55%, and 57% of total revenues, respectively, in 2006, 2005, and 2004.

Preservation of Human Tissue for Transplant

The Company’s proprietary preservation process involves the recovery of tissue from deceased human donors by tissue bank and organ procurement organizations, the timely and controlled delivery of such tissue to the Company, the screening, dissection, disinfection, and preservation of the tissue by the Company, the storage and shipment of the cryopreserved tissue, and the controlled thawing of the tissue. Thereafter, the tissue is surgically implanted into a human recipient.

The transplant of human tissue that has not been preserved must be accomplished within extremely short time limits (for example less than eight hours for transplants of the human heart). Prior to the advent of human tissue cryopreservation, these time constraints resulted in the inability to use much of the tissue donated for transplantation. The application of the Company’s cryopreservation technologies to donated tissue expands the amount of human tissue available to physicians for transplantation. Cryopreservation also expands the treatment options available to physicians and their patients by offering alternatives to implantable mechanical, synthetic, and animal-derived devices. The tissues presently cryopreserved by the Company include human heart valves, non-valved conduits, and vascular tissue.

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CryoLife maintains and collects clinical data on the use and effectiveness of implanted human tissues that it has preserved, and shares this data with implanting physicians and the procurement organizations from which it receives tissue. The Company also uses this data to help direct its continuing efforts to improve its preservation services through ongoing research and development. Its clinical research staff and technical representatives assist physicians by providing educational materials, seminars, and clinics on methods for handling and implanting the tissue cryopreserved by the Company and the clinical advantages, indications, and applications for those tissues. The Company has ongoing efforts to train and educate physicians on the indications for and uses of the human tissues cryopreserved by the Company, as well as its programs whereby surgeons train other surgeons in best-demonstrated techniques. The Company also assists organ procurement agencies and tissue banks through training and development of protocols and provides materials to improve their tissue recovery techniques and, thereby, increase the yield of usable tissue.

Human Cardiovascular Tissue.The human heart valves and conduits cryopreserved by the Company are used in reconstructive heart valve replacement surgery. CryoLife shipped approximately 62,600 cryopreserved human heart valves and conduits from 1984 through 2006, including approximately 2,200 shipments in 2006. Revenues from human heart valve and conduit preservation services accounted for 20% of total revenues in 2006, 2005, and 2004. Based on CryoLife’s records of documented implants, management believes that the acceptance of the Company’s cryopreserved allograft heart valve is due in part to physicians’ recognition of the longevity and natural functionality of the Company’s cryopreserved human tissues, the Company’s documented clinical data, and the Company’s technical representation, which includes its direct technical service representatives and customer service department. Management believes the Company offers advantages in the area of clinical data and technical service representatives as compared to other allograft processors and that the Company’s allograft tissues offer advantages in certain areas over mechanical, porcine, and bovine heart valve alternatives. The Company currently applies its preservation services to human aortic and pulmonary heart valves for implantation by cardiac surgeons. In addition the Company provides cryopreserved human non-valved conduit and patch tissue to surgeons who wish to perform certain specialized cardiac repair procedures. Each of these cryopreserved human heart valves, non-valved conduits, and patches maintains a tissue structure which more closely resembles and performs like the patient’s own tissue than non-human tissue alternatives.

In February 2000 the Company began distributing in the U.S. cryopreserved human heart valves and conduits utilizing its SynerGraft decellularization technology which may reduce antigens. As discussed in “—FDA Order on Human Tissue Preservation and Other FDA Correspondence and Notices,” in early 2003 the Company suspended the use of SynerGraft technology in the processing of allograft heart valves and vascular tissue until the regulatory status of the CryoValve SG and CryoVein SG is resolved.

The Company estimates that the total annual heart valve and non-valved conduit replacement market in the U.S. in 2006 was in excess of $500 million. Management believes that approximately 98,000 heart valve replacement surgeries were conducted in the U.S. in 2006. Of this total number of heart valve and conduit surgeries, approximately 24,000 or 24%, involved mechanical heart valves, and approximately 74,000 or 76%, involved tissue heart valves, including porcine, bovine, and cryopreserved human tissues.

Management believes cryopreserved human heart valves and non-valved conduits have characteristics that make them the preferred replacement option for many patients. Specifically, human heart valves, such as those cryopreserved by the Company, allow for more normal blood flow and provide higher cardiac output than porcine, bovine, and mechanical heart valves. Human heart valves are not as susceptible to progressive calcification, or hardening, as are traditional glutaraldehyde-fixed porcine and bovine heart valves, and do not require anti-coagulation drug therapy, as do mechanical valves. The synthetic sewing rings contained in mechanical and stented porcine and bovine valves may harbor bacteria leading to endocarditis. Furthermore, prosthetic valve endocarditis can be difficult to treat with antibiotics, and this usually necessitates the surgical removal of these valves at considerable cost, morbidity, and risk of mortality. Consequently, for many physicians, human heart valves are the preferred alternative to mechanical and stented porcine valves for patients who have or are at risk to contract endocarditis.

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The following table sets forth the characteristics of alternative heart valve implants that management believes make cryopreserved human heart valves the preferred replacement for certain patient populations:

   Page
Part III

Cryopreserved
Human
Item 10.

  

Porcine

Mechanical

Bovine

Pericardial

Stented

StentlessDirectors, Executive Officers and Corporate Governance

   1
Materials:

Item 11.

  human tissue

Executive Compensation

  glutaraldehyde- fixed pig tissue and synthetic sewing ring7

Item 12.

  glutaraldehyde- fixed pig tissue

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  pyrolitic carbon bi-leaflet and synthetic sewing ring47

Item 13.

  glutaraldehyde- fixed cow tissue

Certain Relationships and synthetic sewing ring

Blood FlowRelated Transactions, and Director Independence

  49

Item 14.

  

Principal Accounting Fees and Service

  51  
Part IV
Dynamics:

Item 15.

  normal

Exhibits, Financial Statement Schedules

  moderate elevation52

SIGNATURES

  nearly normal53  high elevationmoderate elevation
Mode of Failure:gradualgradualexpected to be gradualcatastrophicgradual
Longevity:15-20 years10-15 yearsexpected to exceed stented porcine valves15-20 years10-15 years
Increased Risk of Bleeding or Thromboembolic Events (strokes or other clotting):nooccasionaloccasionalyesoccasional
Anti-Coagulation Drug Therapy Required:noneshort-termshort-termchronicshort-term
Responsiveness to Antibiotic Treatment of Endocarditis:highlowmoderatelowlow

WhileEXPLANATORY NOTE; FORWARD-LOOKING STATEMENTS

CryoLife, Inc. (“CryoLife”, the clinical benefits“Company”, “we” or “us”) is filing this Amendment No. 1 to its Annual Report onForm 10-K for the fiscal year ended December 31, 2015, originally filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2016 (the “Original Filing”), for the purpose of cryopreserved human heart valves discussedproviding the information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K. We have also included hereto as exhibits currently dated certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 and Section 906 of the Sarbanes-Oxley Act of 2002. We are amending Item 15 of Part IV to reflect the inclusion of these certifications and exhibits filed with this Amendment No. 1. Except as described above, are relevant to all patients, they are particularly important for (i) pediatric patients (newborn to 17 years) who are prone to calcification of porcine and bovine tissue, (ii) youngthis Amendment No. 1 does not amend or otherwise active patients who face an increased risk of severe blood loss or even death due to side effects associated withupdate any other information in the anti-coagulation drug therapy required with mechanical valves,Original Filing and (iii) women in their childbearing years for whom anti-coagulation drug therapy is contraindicated.

Human Vascular Tissues.The Company cryopreserves human saphenous veins for use in vascular surgeries that require small diameter conduits (3 mm to 6 mm), suchthis Amendment No. 1 speaks as coronary bypass surgery and peripheral vascular reconstructions. Failure to bypass or revascularize an obstruction in such cases may result in death or the loss of a limb. The Company also cryopreserves femoral veins and arteries for use as vascular grafts. The Company shipped approximately 45,600 human vascular tissues from 1986 through 2006, including approximately 2,800 shipments in 2006. Revenues from human vascular preservation services accounted for 21%, 17%, and 16% of total revenues, respectively, in 2006, 2005, and 2004.

A surgeon’s first choice for replacing diseased or damaged vascular tissue is generally the patient’s own tissue. However, in cases of advanced vascular disease, the patient’s tissue is often unusable, and the surgeon may consider using synthetic grafts or transplanted human vascular tissue. Small diameter synthetic vascular grafts are generally not suitable for below-the-knee surgeries because they have a tendency to occlude over time. Cryopreserved human vascular tissues tend to remain open longer and as such are used in indications where synthetics fail. In addition, synthetic grafts are not suitable for use in infected areas since they may harbor bacteria and make treatment with antibiotics difficult. Therefore, cryopreserved human vascular tissues are also a preferred graft alternative for patients with previously infected graft sites. The Company’s cryopreserved human vascular tissues are used for peripheral vascular reconstruction, coronary artery bypass surgeries, and venous valve transplantation. In cases of peripheral arteriosclerosis, a cryopreserved saphenous vein can be implanted as a bypass graft for the diseased artery in order to improve blood flow and maintain a functional lower limb. The only alternative for many of these patients is amputation. A subset of coronary artery bypass procedures are re-operations and are candidates for preserved vascular tissue when the patients’ own tissue is not available.

Human Orthopaedic Tissue.The Company historically provided preservation services for surgical replacements for the meniscus and the anterior and posterior cruciate ligaments, which are critical to the proper operation of the human knee. In December 2006 CryoLife entered into an exchange and services agreement with RTI respecting procurement, processing, and distribution activities for cardiovascular and vascular tissue processed and distributed by RTI and orthopaedic tissue for theoriginal filing date of our Annual ReportForm 10-K. This

9


knee processed and distributed by CryoLife. According to the RTI Agreement, CryoLife ceased accepting for processing donated human orthopaedic tissue on January Amendment No. 1 2007 and will work to transition existing arrangements for recovery of human orthopaedic tissue to RTI. CryoLife will continue to distribute its existing orthopaedic tissue inventory through June 30, 2008. After that date RTI will become entitled to distribute CryoLife’s remaining orthopaedic tissue inventory, for a fee. Under the RTI Agreement, from July 1, 2008 through December 31, 2016, except as set forth above, CryoLife has agreed not to market or solicit orders for certain human orthopaedic tissues.

CryoLife shipped approximately 31,100 human connective tissues for the knee through the end of 2006, including approximately 1,800 shipments in 2006. Revenues from human orthopaedic preservation services accounted for 9%, 7%, and 5% of total revenues, respectively, in 2006, 2005, and 2004.

Human menisci provide orthopaedic surgeons with an alternative treatment in cases where a patient’s meniscus has been completely removed (meniscectomy). When a patient has a damaged meniscus, the current surgical alternatives are to repair, partially remove, or completely remove the patient’s meniscus, with partial removal being the most common procedure. Meniscal removal increases the risk of premature knee degeneration and arthritis, and typically results in the need for knee replacement surgery at some point during the patient’s life. Management believes that there are no synthetic total menisci on the market.

Tendons are primarily used for the reconstruction of the anterior and posterior cruciate ligaments in cases where the patient’s ligaments are irreparably damaged. Surgeons have traditionally removed a portion of the patient’s patellar tendon from the patient’s undamaged knee for use in repairing a damaged anterior cruciate ligament. Cryopreserved tendons provide an alternative to this procedure. Because surgeries using preserved human tissue do not involve the removal of any of the patient’s own patellar tendon, the patient recovery period is typically shorter. Additionally, in May 2005 the Company began shipping tendons terminally sterilized with gamma irradiation. The Company obtained a non-exclusive license for this technology from Clearant, Inc. for a period of time equal to the life of the last licensed patent related to this technology. This technology is designed to inactivate pathogens including bacteria and fungi. In January 2007 CryoLife terminated this license agreement as a result of the RTI Agreement discussed above.

Osteoarticular allografts represent a biological alternative for the replacement of injured or diseased portions of the articular surface of the knee. Osteoarticular allografts are used for patients in whom cartilage defects are extensive and there is not enough autograft tissue available for harvesting.

Medical Devices

CryoLife O’Brien Aortic Heart Valve.The Company developed and commercialized its bioprosthetic cardiovascular and vascular devices based on its experience with cryopreserved human tissue implants. The CryoLife O’Brien aortic heart valve is a stentless porcine valve with design features that include a matched composite leaflet design that approximates human heart valve blood flow characteristics and that requires only a single suture line for surgical implantation. Stented porcine, bovine, and mechanical heart valves are typically fitted with synthetic sewing rings that are rigid and can impede normal blood flow. Unlike most other available porcine and bovine heart valves, the Company’s stentless porcine heart valve has minimal synthetic materials, which decreases the risk of endocarditis, a debilitating and potentially deadly infection. Management believes these features provide advantages over certain other stentless porcine and bovine heart valves. Glutaraldehyde-fixed porcine and bovine heart valves are often preferred by surgeons for procedures involving elderly patients because they eliminate the risk of patient non-compliance with anti-coagulation drug therapy associated with mechanical valves, they are less expensive than allograft valves, and their shorter longevity is more appropriately matched with these patients’ life expectancies. Glutaraldehyde-fixed porcine and bovine heart valves address an annual worldwide target heart valve market, which the Company estimates to have been $1 billion in 2006.

CryoLife began exclusive worldwide distribution of this valve in 1992 and acquired all rights to the underlying technology in 1995. The Company’s CryoLife O’Brien aortic heart valve is marketed in the EMEA region. Revenues from the CryoLife O’Brien aortic heart valve represented 1% of total revenues in 2006, 2005, and 2004.

SynerGraft Model 100 Vascular Graft.In July 2001 the Company received CE Mark approval for its SynerGraft Model 100 vascular graft for dialysis access. The SynerGraft Model 100 vascular graft is produced from a bovine ureter in lengths of 25, 30, 35, and 50 cm. The SynerGraft Model 100 vascular graft canshould be stored at room temperature. The Company’s SynerGraft decellularization technology which may reduce antigens involves the removal of cells from the structure of animal tissue, leaving a collagen matrix that has the potential to repopulate in the recipient with the recipient’s own cells. Animal

10


studies and explants from human recipients have documented that allograft heart valves processed with the SynerGraft process have repopulated themselves in the recipient with the recipient’s own cells. This process is designed to increase allograft longevity, and more generally to improve the biocompatibility and functionality of such tissue.

CardioWrap.On January 17, 2007 the Company announced that it has signed a three-year agreement with MAST Biosurgery, Inc. to exclusively distribute CardioWrap, a bioresorbable thin film sheet used to replace the pericardium in cardiac reconstruction and other cardiac surgeries in which the patient may face re-operation within six months. CardioWrap is made from polylactic acid, a polymer composed of lactic acid, similar to that which occurs naturally in the human body. CardioWrap maintains its strength during the healing process while slowly breaking down into lactic acid molecules. These molecules are ultimately metabolized into carbon dioxide and water and released from the body through the lungs. Available in several sizes and thicknesses, sheets of CardioWrap can be cut or shaped with scissors to the desired size, allowing CardioWrap to conform to most anatomical needs.

ProPatch Soft Tissue Repair Matrix.On December 11, 2006 the Company announced that it has received 510(k) clearance from the FDA for its ProPatch Soft Tissue Repair Matrix. ProPatch, developed from bovine pericardial tissue, is used to reinforce weakened soft tissues and provides a resorbable scaffold that is replaced by the patient’s own soft tissue.

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality”, regarding seasonality of the Company’s products and human tissue preservation services.

See Note 19 to the Company’s consolidated financial statements regarding segment and geographic information at Part II, Item 8, of this Form 10-K.

Procurement, Sales, Distribution, and Marketing

BioGlue

In the U.S. the Company markets BioGlue to physicians and distributes it through its technical representative employees. The Company markets and distributes BioGlue in international markets through direct technical representatives employed by the Company’s wholly owned European subsidiary, CryoLife Europa Ltd. (“Europa”) and other independent representatives. Through its technical representatives, the Company conducts field training for doctors with respect to the application of BioGlue.

During 1998 the Company signed an exclusive agreement with Century Medical, Inc. for the introduction and distribution of BioGlue in Japan. Under the terms of the agreement, Century Medical is responsible for applications and clearances with the Japanese Ministry of Health and Welfare. The application has been submitted to the Japanese Ministry of Health and Welfare. The review process is ongoing.

Preservation Services

CryoLife markets its preservation services to tissue procurement agencies, implanting physicians, and prospective tissue recipients. The Company works with tissue banks and organ procurement agencies to ensure consistent and continued availability of donated human tissue for transplant and educates physicians and prospective tissue recipients with respect to the benefits of cryopreserved human tissues.

Procurement of Tissue.Donated human tissue is procured from deceased human donors by organ procurement agencies and tissue banks. After procurement, the tissue is packed and shipped, together with certain information about the tissue and its donor, to the Company in accordance with the Company’s protocols. The tissue is transported to the Company’s laboratory facilities via commercial airlines pursuant to arrangements with qualified courier services. Timely receipt of procured tissue is important, as tissue that is not received promptly cannot be cryopreserved successfully. The procurement agency is reimbursed by the Company for the costs associated with these procurement services. The procurement fee and related shipping costs, together with the charges for the preservation services of the Company, are ultimately paid to the Company by the hospital with which the implanting physician is associated. The Company has developed relationships with approximately 80 tissue banks and organ procurement agencies throughout the U.S. Management believes these relationships are critical in the preservation services industry and that the breadth of these existing relationships provides the Company with a significant advantage over potential new entrants to this market. The Company employs approximately 27 individuals in donor services to work with organ procurement agencies and tissue banks. This includes five account managers who are stationed throughout the country to work directly with our customers. The Company’s central office for procurement relations is staffed 24 hours per day, 365 days per year.

11


Preservation of Tissue.Upon receiving tissue, a Company technician completes the documentation control for the tissue prepared by the procurement agency and gives it a control number. The documentation identifies, among other things, donor age and cause of death. A trained technician then removes the portion or portions of the delivered tissue that will be processed. These procedures are conducted under aseptic conditions in clean rooms. At the same time, samples are taken from the donated tissue and subjected to the Company’s quality assurance program. This program, which includes review of the donor and tissue charts by CryoLife’s tissue quality assurance department and its medical directors, may identify characteristics which would disqualify the tissue for preservation or implantation. Once the tissue is approved, it is moved from quarantine to an implantable status. Tissue that does not pass testing is appropriately discarded.

Cardiovascular, vascular, and orthopaedic tissues are cryopreserved in a proprietary freezing process conducted according to Company protocols. After the preservation process, the tissues are transferred to liquid nitrogen freezers for long-term storage at temperatures at or below - 135°C. The entire preservation process is controlled by guidelines established by the Company.

Distribution of Tissue to Implanting Physicians.After the tissue has cleared quality control assurance and the tissue is moved to an implantable status, the tissue is stored by the Company or is delivered directly to hospitals at the implanting physician’s request. Cryopreserved tissue must be transported under stringent handling conditions and maintained within specific temperature tolerances at all times. Cryopreserved tissue is packaged for shipment using the Company’s proprietary processes. At the hospital the tissue is held in a liquid nitrogen freezer according to Company protocols pending implantation. The Company provides a detailed protocol for thawing the cryopreserved tissue. The Company also makes its technical personnel available by phone or in person to answer questions. After the Company transports the tissue to the hospital, the Company invoices the institution for its services, the procurement fee, and transportation costs.

The Company provides Company-owned liquid nitrogen freezers to certain client hospitals. The Company has currently installed approximately 300 of these freezers. Participating hospitals generally pay the cost of liquid nitrogen and regular maintenance. The availability of on-site freezers makes it easier for a hospital’s physicians to utilize the Company’s preservation services by making the cryopreserved tissue more readily available. Because fees for the Company’s preservation services become due upon the shipment of tissue to the hospital, the use of such on-site freezers also reduces the Company’s working capital needs.

Marketing, Educational, and Technical Support.The Company has records of over 987 cardiovascular and vascular surgeons and over 352 orthopaedic surgeons who have implanted tissues cryopreserved by the Company during the past twelve months. The Company works to maintain relationships with and market to surgeons within these medical specialties. Because the Company markets its preservation services directly to physicians, an important aspect of increasing the distribution of the Company’s preservation services is educating physicians on the use of cryopreserved human tissue and on proper implantation techniques. Trained field support personnel provide support to implanting institutions and surgeons. The Company currently employs approximately 34 persons as technical service representatives and four region managers who deal primarily with cardiovascular and vascular surgeons and provide field support. These representatives receive a base salary with a performance bonus. The Company currently has approximately 180 independent technical service representatives and sub-representatives who are employed by distributor groups who deal primarily with orthopaedic surgeons and who are paid on a commission basis.

The Company sponsors physician training seminars where physicians teach other physicians the proper technique for handling and implanting cryopreserved human tissue. The Company also produces educational videotapes for physicians and coordinates live surgery demonstrations at various medical institutions. In addition the Company coordinates laboratory sessions that utilize animal tissue to demonstrate surgical techniques. Management believes that these activities improve the medical community’s acceptance of the cryopreserved human tissue processed by the Company and help to differentiate the Company from other allograft processors.

To assist procurement agencies and tissue banks, the Company provides educational materials and training on procurement, dissection, packaging, and shipping techniques. The Company also produces educational videotapes and coordinates laboratory sessions on procurement techniques for procurement agency personnel. To supplement its educational activities, the Company employs in-house technical specialists that provide technical information and assistance, and maintains a staff 24 hours per day, 365 days per year for customer support.

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Bioprosthetic Cardiovascular Devices

The Company markets and distributes the CryoLife O’Brien stentless aortic heart valve and the SynerGraft Model 100 Vascular Graft in the EMEA region. Marketing efforts for the CryoLife O’Brien aortic heart valve are primarily directed toward cardiac surgeons. Marketing efforts for the SynerGraft Model 100 are primarily directed toward vascular surgeons.

European Operations

The Company markets its products in the EMEA regions through its European subsidiary, CryoLife Europa Ltd, based in Guildford, United Kingdom. Europa, with its team of approximately eleven employees, provides customer service, logistics, marketing, and clinical support to cardiovascular, vascular, thoracic, and general surgeons throughout the EMEA regions. Europa markets and distributes the Company’s complete range of products through its direct sales representatives in England and Wales and a network of independent agents and distributors in the EMEA regions.

Backlog

The limited supply of tissue that is donated and available for processing typically results in a backlog of orders in the Company’s human tissue business. The amount of backlog fluctuates based on the tissues available for shipment and varies based on the surgical needs of specific cases. The Company’s backlog is generally not considered firm and must be confirmed with the customer before shipment. The Company currently does not have a backlog of orders related to BioGlue, CryoLife O’Brien heart valves, or SynerGraft bovine vascular grafts.

Research and Development

The Company uses its expertise in biochemistry and cell biology, and its understanding of the needs of the cardiovascular, and vascular, surgery medical specialties, to expand its surgical adhesive and preservation businesses in the U.S. and to develop or acquire implantable products and technologies for these specialties. The Company seeks to identify market areas that can benefit from preserved living tissues and other related technologies, to develop innovative techniques and products within these areas, to secure their commercial protection, to establish their efficacy, and then to market these techniques and products. The Company employs approximately 18 people in its research and development department, including seven PhDs with specialties in the fields of molecular biology, protein chemistry, vascular physiology, and biochemistry.

In order to expand the Company’s service and product offerings, the Company is currently in the process of developing or investigating several technologies and products, including technologies related to human tissue preservation to further enhance its safety, its Protein Hydrogel Technology used in BioGlue and other BioGlue derivatives, additional applications of its SynerGraft technology, and its Activation Control Technology (“ACT”).

BioFoam, a derivative of the PHT, is in preclinical development. BioFoam contains an expansion agent, which has the potential to rapidly fill and seal internal body cavities, such as aneurysm sacs, and may provide hemostatsis in penetrating wounds and severe trauma. The 2005, 2006, and 2007 U.S. Congress Defense Appropriations Conference Reports included $926,000, $2.3 million, and $1.0 million, respectively, for the continued development of protein hydrogel technology for use on the battlefield. The Company applied for and was awarded the full $926,000 under the 2005 bill. The Company applied for funding for BioFoam development under the 2006 bill in July 2006 but has not yet been notified of an award decision. The Company anticipates applying for funding under the 2007 bill during 2007. CryoLife is currently involved in initial animal trials related to this grant.

BioDisc, a derivative of the PHT, is undergoing clinical evaluation to determine its clinical utility as a nucleus pulposus replacement in spinal disc repair. The nucleus pulposus is surrounded by fibrous tissue (annulus fibrosis) and is located in the center of the vertebral disc. The nucleus pulposus is composed of a gelatinous-like material thatread in conjunction with the annulus fibrosis acts as a cushion or shock absorber to the spinal column. If the nucleus pulposus herniates through the annulus, it may be removed in a procedure known as a discectomy. BioDisc is designed to fill the area where the nucleus pulposus was removed,our Original Filing and is intended to preserve disc height, reduce lumbar motion segment instability, and reduce recurrent disc herniation. The ten patient study enrollment has been completed and patient follow-up will continue through 2007. An interim analysis of data will be used for CE Mark submission anticipated in 2007.

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In October 2006 the Company announced that it has signed a licensing and distribution agreement with BioForm for the development and commercialization of BioGlue for use in cosmetic and plastic surgery indications. The agreement calls for BioForm to fund the clinical development and regulatory approval process for commercializing BioGlue for use in cosmetic and plastic surgery indications in the United States, Canada, and various countries in Europe. In addition, BioForm will oversee all aspects of the marketing, sales and distribution of BioGlue in the United States, Canada, and various countries in Europe for these indications. CryoLife will remain the exclusive supplier of BioGlue for all applications. Under the terms of the agreement, CryoLife received an initial fee from BioForm, and will receive a milestone payment upon the first FDA approval for use in cosmetic and plastic surgery indications.

In February 2001 the Company formed AuraZyme Pharmaceuticals, Inc. (“AuraZyme”) to foster the commercial development of its ACT. The ACT is a reversible linker technology that might have possible uses in the areas of fibrinolysis (blood clot dissolving), and other drug delivery applications. Since 1998 management has been seeking to advance the development of drug delivery therapies utilizing the ACT through grants, research and development partnerships, joint ventures, and equity investments thereby allowing the Company to focus its resources on the commercial development of its BioGlue, SynerGraft technology, and other products under development.

To the extent the Company identifies additional applications for its products, the Company may attempt to license these products to corporate partners for further development of such applications or seek funding from outside sources to continue the commercial development of such technologies. The Company may also attempt to license technologies from third parties to supplement its product lines.

The Company’s research and development strategy is to allocate available resources among the Company’s core market areas of preservation services and implantable medical devices, based on the size of the potential market for any specific product candidate and the estimated development time and cost required to bring the product to market. Research on these and other projects is conducted in the Company’s research and development laboratory or at universities or clinics where the Company sponsors research projects. In 2006, 2005, and 2004 the Company spent approximately $3.5 million, $3.7 million, and $3.9 million respectively, on research and development activities on new and existing products. These amounts represented approximately 4%, 5%, and 6% of the Company’s revenues for the years 2006, 2005, and 2004, respectively. The Company’s medical and scientific advisory board consults on various research and development programs. The Company’s pre-clinical studies are conducted at universities and other locations outside the Company’s facilities by third parties under contract with the Company. In addition to these efforts the Company may pursue other research and development activities.

Manufacturing and Operations

The Company’s corporate headquarters and laboratory facilities consist of approximately 200,000 square feet of leased manufacturing, administrative, laboratory, and warehouse space located on a 21.5-acre setting in suburban Atlanta, Georgia with an additional 7,600 square feet of offsite warehouse space. Approximately 20,000 square feet are dedicated to thirty-one class 10,000 clean rooms. An additional 5,500 square feet are dedicated as class 100,000 clean rooms. The extensive clean room environment provides a controlled environment for tissue dissection and processing, manufacturing, and packaging. Approximately 55 liquid nitrogen storage units maintain cryopreserved tissue at or below – 135°C. Two back-up emergency generators assure continuity of Company manufacturing operations. Additionally, the Company’s corporate complex includes the Ronald C. Elkins Learning Center, a 3,600 square foot auditorium that holds 225 participants, and a 1,500 square foot training lab, both equipped with closed-circuit and satellite television broadcast capability allowing live surgery broadcasts from and to anywhere in the world. The Elkins Learning Center provides visiting surgeons with a hands-on training environment for surgical and implantation techniques for the Company’s technology platforms.

Human Tissue Processing

The human tissue processing laboratory is responsible for the processing and preservation of human cardiovascular and vascular tissue for transplant. The laboratory processed human orthopaedic tissues for transplant until December 31, 2006. On January 1, 2007 the laboratory ceased processing human orthopaedic tissues pursuant to the RTI Agreement. This laboratory contains approximately 15,600 square feet with a suite of nine clean rooms. Currently there are approximately 70 technicians employed in this area, and the laboratory is staffed for 24 hours per day, 365 days per year. In 2006 the laboratory packaged approximately 14,400 human allografts. The current processing level is estimated to be at about 20% of total capacity. The volume of tissue processed is currently constrained by the availability of tissue. To increase the current processing levels, the Company could increase the number of employees, expand its second and third shift, and add equipment.

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BioGlue

BioGlue is presently manufactured at the Company’s headquarters facility. The laboratory contains approximately 13,500 square feet, including a suite of six clean rooms. Currently, there are 16 technicians employed in this area. The laboratory has a potential annual capacity of approximately 2 million cartridges or syringes of BioGlue. The current processing level is about 5% of total capacity. To produce at full capacity levels, the Company would need to increase the number of employees, add work shifts, and install automated filling and pouching equipment.

Bioprosthetic Cardiovascular and Vascular Devices

The bioprosthesis laboratory at the Company’s headquarters facility is responsible for the manufacturing of the CryoLife O’Brien stentless aortic heart valve, the SynerGraft Model 100 Vascular Graft. This laboratory is approximately 20,000 square feet with a suite of six clean rooms for tissue processing. Currently, this laboratory employs seven technicians.

Europa

The Company maintains a leased facility located in Guildford, United Kingdom for its European subsidiary Europa that contains approximately 3,400 square feet of office and warehousing space.

Quality Assurance

The Company’s operations encompass the manufacturing of bioadhesives and bioprosthetics and human tissue preservation services. In all of its facilities the Company is subject to regulatory standards for good manufacturing practices, including current Quality System Regulations, which are the FDA regulatory requirements for medical device manufacturers. The FDA periodically inspects Company facilities to review Company compliance with these and other regulations. The Company also operates according to ISO 13485 Quality System Requirements, an internationally recognized voluntary system of quality management for companies that design, develop, manufacture, distribute, and service medical devices. The Company maintains a Certification of Approval to the ISO 13485. Lloyd’s Register Quality Assurance Limited (“LRQA”) issues this approval. LRQA is a Notified Body officially recognized by the EEA to perform assessments of compliance with ISO 13485 and its derivative standards. LRQA performs periodic on-site inspections, generally at least annually, of the Company’s quality systems.

The Company’s quality assurance staff is comprised primarily of experienced professionals from the medical device manufacturing industry. The quality assurance department, in conjunction with the Company’s research and development department, routinely evaluates the Company’s processes and procedures.

Bioadhesive and Bioprosthetic Manufacturing

The Company employs a comprehensive quality assurance program in all of its manufacturing activities. The Company is subject to Quality System Regulations, additional FDA regulations, and ISO 13485 requirements.

All materials and components utilized in the production of the Company’s products are received and inspected by trained quality control personnel, according to written specifications and standard operating procedures. Only materials and components found to comply with Company standards are accepted by quality control and utilized in production.

All materials, components, and resulting sub-assemblies are documented throughout the manufacturing process to assure traceability. Each process is documented along with all inspection results, including final finished product inspection and acceptance. All processes in manufacturing are validated by quality engineers to produce products meeting the Company’s specifications. The Company maintains a quality assurance program to evaluate and inspect manufactured products to ensure conformity to product specifications. Records are maintained as to the consignees of products to track product performance and to facilitate product removals or corrections, if necessary.

Each manufacturing facility is subject to periodic inspection by the FDA and LRQA to independently review the Company’s compliance with its systems and regulatory requirements.

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Preservation Services

The Company also employs a comprehensive quality assurance program in all of its tissue processing activities. The Company is subject to Donor Eligibility and Good Tissue Practice regulations, as well as other FDA Quality System Regulations, and ISO 13485 requirements. The Company’s quality assurance program begins with the development and implementation of training policies and procedures for the employees of procurement agencies. To assure uniformity of procurement practices among the tissue recovery teams, the Company provides procurement protocols, transport packages, and tissue transport liquids to the procurement organizations. The Company also periodically audits procurement organizations to ensure and enhance best recovery practices.

Upon receipt by the Company, each tissue is assigned a unique control number that provides traceability of tissue from procurement through the processing and preservation processes, and ultimately to the tissue recipient. Samples from each tissue donor are subjected to a variety of tests to screen and test for infectious diseases. Samples of some tissues are also provided for pathology testing. Following dissection of the tissue to be cryopreserved, dissected tissue is treated with a proprietary antimicrobial solution and aseptically packaged. After antimicrobial treatment, each tissue must be shown to be free of detectable microbial contaminants by two independent tests before being considered releasable for distribution.

The materials and solutions used by the Company in processing tissue must meet the Company’s quality standards and be approved by quality assurance personnel for use in processing. Throughout tissue processing, detailed records of the tissues, materials, and processes are maintained and reviewed by quality assurance personnel.

The States of Georgia, New York, Florida, Maryland, and California annually license the Company’s tissue processing facilities as facilities that process, store, and distribute human tissue for implantation. The regulatory bodies of these states perform inspections of the facilities as required to ensure compliance with state law and regulations. Human tissue processed by the Company must also comply with FDA regulations for determining donor eligibility and for processing human cell and tissue products for implantation under current Good Tissue Practices (“cGTPs”). The FDA periodically audits the Company’s processing facilities for compliance with those requirements. See “—FDA Order on Human Tissue Preservation and Other FDA Correspondence and Notices—Other FDA Correspondence and Notices” above for a discussion of recent inspections.

Patents, Licenses, and Other Proprietary Rights

The Company relies on a combination of patents, trademarks, confidentiality agreements and security procedures to protect its proprietary products, processing technology, trade secrets, and know-how. The Company believes that its patents, trade secrets, trademarks, and technology licensing rights provide it with important competitive advantages. The Company owns or has licensed rights to 37 U.S. patents and 69 foreign patents, including patents relating to its technology for human cardiovascular and vascular tissue preservation, tissue revitalization prior to freezing, tissue transport, BioGlue, ACT, and packaging. The Company has approximately 12 pending U.S. patent applications and 73 pending foreign applications that relate to areas including the Company’s cryopreservation, Protein Hydrogel Technologies, and other areas. There can be no assurance that any patents pending will result in issued patents. The remaining duration of the Company’s issued patents ranges from 1 to 17 years.

There can be no assurance that the claims allowed in any of the Company’s existing or future patents will provide competitive advantages for the Company’s products, processes, and technologies or will not be successfully challenged or circumvented by competitors. To the extent that any of the Company’s products or services are not effectively patent protected, the Company’s business, financial condition, and results of operations could be materially adversely affected. Under current law, patent applications in the U.S. and patent applications in foreign countries are maintained in secrecy for a period after filing. The right to a patent in the U.S. is attributable to the first to invent, not the first to file a patent application. The Company cannot be sure that its products or technologies do not infringe patents that may be granted in the future pursuant to pending patent applications or that its products do not infringe any patents or proprietary rights of third parties. The Company may incur substantial legal fees in defending against a patent infringement claim or in asserting claims against third parties. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from marketing certain of its products or could be required to obtain licenses from the owners of such patents or be required to redesign its products or services to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or services to avoid infringement. The Company’s failure to obtain these licenses or to

16


redesign its products or services could have a material adverse effect on the Company’s business, financial condition, and results of operations. The Company has licensed from third parties certain technologies related to its SynerGraft and ACT technologies that call for the payment of royalties based on revenues, when and if such products or services are approved for marketing. The loss of these licenses could adversely affect the Company’s ability to successfully develop certain technologies.

The Company has entered into confidentiality agreements with its employees and several of its consultants and third-party vendors to maintain the confidentiality of trade secrets and proprietary information. There can be no assurance that the obligations of employees of the Company and third parties with whom the Company has entered into confidentiality agreements will effectively prevent disclosure of the Company’s confidential information or provide meaningful protection for the Company’s confidential information if there is unauthorized use or disclosure, or that the Company’s trade secrets or proprietary information will not be independently developed by the Company’s competitors. Litigation may be necessary to defend against claims of infringement, to enforce patents and trademarks of the Company, or to protect trade secrets and could result in substantial cost to, and diversion of effort by, the Company. There can be no assurance that the Company would prevail in any such litigation. In addition the laws of some foreign countries do not protect the Company’s proprietary rights to the same extent, as do the laws of the U.S.

Competition

Implantable Biomedical Devices for Use as Surgical Adhesives and Sealants

The Company competes with many domestic and foreign medical device and pharmaceutical companies. In the surgical adhesive and surgical sealant area, the Company competes primarily with Baxter Healthcare’s Tisseel, FloSeal, and CoSeal, Ethicon’s Evicel and Surgifoam, and Tyco Healthcare’s U.S. Surgical Division’s Duraseal products. Additionally, Johnson & Johnson is under FDA review for a surgical adhesive for approval in vascular sealing. The Company currently competes with these products based on the products’ features, such as strength and ease of use. Competitive products may also be under development by other large medical device, pharmaceutical, and biopharmaceutical companies. Many of the Company’s current and potential competitors have substantially greater financial, technological, research and development, regulatory and clinical, manufacturing, marketing and sales, and personnel resources than the Company.

These competitors may also have greater experience in developing products, conducting clinical trials, obtaining regulatory approvals, and manufacturing and marketing such products. Certain of these competitors may obtain patent protection, approval or clearance by the FDA or foreign countries, or product commercialization earlier than the Company, any of which could materially adversely affect the Company. Furthermore, if the Company commences significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities.

Other recently developed technologies or procedures are, or may in the future be, the basis of competitive products. There can be no assurance that the Company’s current competitors or other parties will not succeed in developing alternative technologies and products that are more effective, easier to use, or more economical than those which have been or are being developed by the Company or that would render the Company’s technology and products obsolete and non-competitive in these fields. In such event, the Company’s business, financial condition, and results of operations could be materially adversely affected. See Part I, Item 1A, “Risk Factors—Risks Relating To Our Business—Rapid Technological Change Could Cause Our Services And Products To Become Obsolete.”

Cryopreserved Human Tissues and Bioprosthetic Cardiovascular Devices

The Company currently faces competition from at least three non-profit tissue banks that cryopreserve and distribute human cardiac and vascular tissue, as well as from several companies that market mechanical, porcine, and bovine heart valves, and synthetic vascular grafts for implantation. Many established companies, some with resources greater than those of the Company, are engaged in manufacturing, marketing, and selling alternatives to cryopreserved human tissue. Management believes that it competes with other entities that cryopreserve human tissue on the basis of technology, customer service, and quality assurance. Following the FDA Order in 2002, the Company experienced a decrease in the procurement and processing of human tissue, a decrease in cardiovascular, vascular, and orthopaedic tissue shipments, and the lack of orthopaedic tissue shipments for a period of time. The Company’s competitors have been favorably impacted and the Company believes it has lost some market share following the FDA Order in 2002. The interruption in the Company’s services, and the changes made to the Company’s preservation services, which have had the effect of substantially increasing tissue processing and release times and reducing the yield of implantable tissue per donor, have had an adverse impact on our profitability.

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Management believes that the human heart valves cryopreserved by the Company, as compared to mechanical, porcine, and bovine heart valves, compete on the factors set forth above, as well as by providing a tissue that is the preferred replacement alternative with respect to certain medical conditions, such as pediatric cardiac reconstruction, valve replacements for women in their child-bearing years, and valve replacements for patients with endocarditis. Generally, for each procedure that may utilize vascular human tissue that the Company cryopreserves, there are alternative treatments. Often, in the case of veins, these alternatives include the repair, partial removal, or complete removal of the damaged tissue and may utilize other tissues from the patients themselves or synthetic products. The attending physician, in consultation with the patient, makes the selection of treatment choices. Any newly developed treatments will also compete with the use of tissue cryopreserved by the Company.

Human and Stentless Porcine Heart Valves.Alternatives to human heart valves cryopreserved by the Company include mechanical valves, porcine valves, and valves constructed from bovine pericardium. St. Jude Medical, Inc. is the leading supplier of mechanical heart valves, and has a marketing and distribution arrangement with a non-profit tissue bank for supplies of cryopreserved human heart valves. Medtronic, Inc. is the leading supplier of porcine heart valves. Edwards Life Sciences, Inc. is the leading supplier of bovine pericardial heart valves. In addition management believes that at least three domestic tissue banks offer preservation services for human heart valves in competition with the Company. The Company presently distributes its stentless porcine heart valve only outside the U.S. This stentless porcine heart valve competes with mechanical valves, stented and stentless porcine valves, human heart valves, and processed bovine pericardial heart valves. The Company is aware of at least five other companies that offer porcine and bovine pericardial heart valves.

Human Vascular Tissue.There are a number of providers of synthetic alternatives to veins cryopreserved by the Company and those alternatives are available primarily in medium and large diameters. Currently, management believes that there are at least two other non-profit tissue banks that cryopreserve and distribute human vascular tissue in competition with the Company. Companies offering either synthetic or allograft products may enter this market in the future.

Human Orthopaedic Tissue.In December 2006 CryoLife entered into the RTI Agreement, discussed above, respecting procurement, processing, and distribution activities for cardiovascular and vascular tissue processed and distributed by RTI and orthopaedic tissue for the knee processed and distributed by CryoLife. According to the RTI Agreement, CryoLife ceased accepting for processing donated human orthopaedic tissue on January 1, 2007 and will work to transition existing arrangements for recovery of human orthopaedic tissue to RTI. Likewise on January 1, 2007, RTI ceased accepting donated human cardiovascular and vascular tissues for processing and will work to transition its arrangements for recovery of these tissues to CryoLife. Certain physical assets relating to the tissues that are the subject of the agreement will also be transferred between the parties. No cash was exchanged in the transaction. CryoLife will continue to distribute its existing orthopaedic tissue inventory, and RTI will continue to distribute its existing cardiovascular and vascular tissue inventory, through June 30, 2008. After that date, CryoLife will become entitled to distribute RTI’s remaining cardiovascular and vascular tissue inventory, and RTI will become entitled to distribute CryoLife’s remaining orthopaedic tissue inventory, for a fee. Under the RTI Agreement, from July 1, 2008 through December 31, 2016, except as set forth above, CryoLife has agreed not to market or solicit orders for certain human orthopaedic tissues and RTI has agreed not to market or solicit orders for human cardiac and vascular tissues.

The Company’s historic competition in the area of orthopaedic tissue has varied according to the tissue involved. When transplantation is indicated, the historic principal competition for tendons and meniscus cryopreserved by the Company has been either freeze-dried or twice frozen human connective tissues. More than ten tissue banks process these alternative allografts.

Government Regulation

U.S. Federal Regulation of Medical Devices

Because BioGlue and certain human heart valves are, and other Company products may in the future be, regulated as medical devices, the Company and these products are subject to the provisions of the Federal Food, Drug, and Cosmetic Act (“FDCA”) and implementing regulations of the U.S. Food and Drug Administration (“FDA”). Pursuant to the FDCA, the FDA regulates the manufacture, distribution, labeling, and promotion of medical devices in the U.S. Also various foreign countries in which the Company’s products are, or may be, distributed impose additional regulatory requirements.

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The FDCA provides that, unless exempted by regulation, medical devices may not be distributed in the U.S. unless they have been approved or cleared for marketing by the FDA. There are two review procedures by which medical devices can receive such approval or clearance. Some products may qualify for clearance to be marketed under a Section 510(k) (“510(k)”) procedure, in which the manufacturer provides a premarket notification that it intends to begin marketing the product, and shows that the product is substantially equivalent to another legally marketed 510(k) product (i.e., that it has the same intended use, it is as safe and effective as a legally marketed 510(k) device, and it does not raise different questions of safety and effectiveness than does a legally marketed device). In some cases, the submission must include data from clinical studies. Marketing may commence when the FDA issues a clearance letter finding such substantial equivalence.

If the product does not qualify for the 510(k) procedure (either because it is not substantially equivalent to a legally marketed 510(k) device or because it is a Class III device required by the FDCA and implementing regulations to have an approved application for premarket approval (“PMA”)), the FDA must approve a PMA application before marketing can begin. PMA applications must demonstrate, among other matters, that the medical device is safe and effective. A PMA application is typically a complex submission, usually including the results of human clinical studies, and preparing an application is a detailed and time-consuming process. Once a PMA application has been submitted, the FDA’s review may be lengthy and may include requests for additional data.

The FDCA also provides for an investigational device exemption (“IDE”) which authorizes distribution for clinical evaluation of devices that lack a PMA or 510(k) clearance. Devices subject to an IDE are subject to various restrictions imposed by the FDA. The number of patients that may be treated with the device is limited, as is the number of institutions at which the device may be used. Patients must give informed consent to be treated with an investigational device, and review by an Institutional Review Board is needed. The device must be labeled that it is for investigational use and may not be advertised or otherwise promoted, and the price charged for the device may be limited. Unexpected adverse experiences must be reported to the FDA.

Under certain circumstances, the FDA may grant a Humanitarian Device Exemption (“HDE”). The FDA grants HDE’s in an attempt to encourage the development of medical devices for use in the treatment of rare conditions that affect small patient populations. An approval by the FDA exempts such devices from full compliance with clinical study requirements for PMA.

The FDCA requires all medical device manufacturers and distributors to register with the FDA annually and to provide the FDA with a list of those medical devices that they distribute commercially. The FDCA also requires manufacturers of medical devices to comply with labeling requirements and to manufacture devices in accordance with Quality System Regulations, which require that companies manufacture their products and maintain their documents in a prescribed manner with respect to good manufacturing practices, design, document production, process, labeling and packaging controls, process validation, and other quality control activities. The FDA’s medical device reporting regulation requires that a device manufacturer provide information to the FDA on death or serious injuries alleged to have been associated with the use of its products, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. The FDA further requires that certain medical devices that may not be sold in the U.S. follow certain procedures before they are exported.

The FDA inspects medical device manufacturers and distributors and has authority to seize noncomplying medical devices, to enjoin and/or to impose civil penalties on manufacturers and distributors marketing non-complying medical devices, to criminally prosecute violators, and to order recalls in certain instances.

Human Heart Valves.The Company’s human heart valves became subject to regulation by the FDA in June 1991, when the FDA published a notice stating that human heart valves were Class III medical devices under the FDCA. The June 1991 notice provided that distribution of human heart valves for transplantation would violate the FDCA unless they were the subject of an approved PMA or IDE on or before August 26, 1991.

On October 14, 1994 the FDA announced in the Federal Register that neither an approved application for PMA nor an IDE is required for processors and distributors who had marketed heart valve allografts before June 26, 1991. This action by the FDA resulted in the allograft heart valves being classified as Class II Medical Devices and has removed them from clinical trial status. It also allowed the Company to distribute such valves to cardiovascular surgeons throughout the U.S.

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On May 25, 2005, with the promulgation of the final rule for cGTPs, the FDA reclassified human heart valves, processed on or after May 25, 2005, as human tissue subject to that rule.

As discussed in “—FDA Order on Human Tissue Preservation and Other FDA Correspondence and Notices”, the Company has filed a 510(k) premarket notification with the FDA for the CryoValve SG and has received three letters from the FDA requesting that additional information be provided to support the 510(k) submission. CryoLife has responded to some of the requests, anticipates responding to some of the additional requests, and has initiated an appeal of others through administrative procedures.

Porcine Heart Valves.Porcine heart valves are Class III medical devices, and FDA approval of a PMA is required prior to commercial distribution of such valves in the U.S. The porcine heart valves currently marketed by the Company have not been approved by the FDA for commercial distribution in the U.S. but may be manufactured in the U.S. and exported to foreign countries if the valves meet the specifications of the foreign purchaser, and do not conflict with the laws of and are approved by the country to which they will be exported.

BioGlue.The FDA regulates BioGlue as a Class III medical device. In December 2001 the Company received FDA approval for BioGlue as an adjunct to sutures and staples for use in adult patients in open surgical repair of large vessels. Prior to this approval, the Company received an HDE in December 1999 for BioGlue for use as an adjunct in repair of acute thoracic aortic dissections. The product is Health Canada, Australia, and CE Mark approved for additional soft tissue repair.

U.S. Federal Regulation of Human Tissue

The Company’s non-valved conduits, vascular grafts, and orthopaedic tissues are not currently subject to regulation under the FDCA as medical devices. See “FDA Order on Human Tissue Preservation and Other FDA Correspondence and Notices—Other FDA Correspondence and Notices” regarding correspondence from the FDA about cardiovascular and vascular tissues processed with the SynerGraft technology.

However, the FDA does regulate these products pursuant to Section 361 of the Public Health Services Act, which in turn provides the regulatory framework for regulation of human cellular and tissue products (21 C.F.R. Parts 1270 and 1271). Historically, heart valves were one of a small number of processed human tissues over which the FDA asserted medical device jurisdiction. Concerns with the transmission of HIV and Hepatitis B led the FDA to issue an Interim Rule in December 1993 as an emergency measure to protect the public from any human tissue that had incomplete or no documentation ascertaining its freedom from communicable diseases. The FDA modified the regulation and reissued it as a new rule, effective January 1998, which focused on donor screening and testing to prevent the introduction, transmission, and spread of HIV-1 and -2 and Hepatitis B and C. The Final Rule set minimal requirements to prevent the transmission of communicable diseases from human tissue used for transplantation. The rule defines human tissue as any tissue derived from a human body which is (i) intended for administration to another human for the diagnosis, cure, mitigation, treatment, or prevention of any condition or disease and (ii) recovered, processed, stored, or distributed by methods not intended to change tissue function or characteristics. The FDA definition excludes, among other things, tissue that currently is regulated as a human drug, biological product, or medical device and excludes kidney, liver, heart, lung, pancreas, or any other vascularized human organ. The current regulations applicable to human tissues include requirements for donor suitability (discussed above), processing standards, establishment registration, and product listing.

On January 19, 2001 the FDA published a final rule that requires human cells, tissue, and cellular and tissue-based products establishments to register with the agency and list their human cells, tissues, and cellular and tissue-based products (“HCT/Ps”). The final rule, 21 C.F.R. Parts 1271, became effective on April 4, 2001 for human tissues intended for transplantation that are regulated under section 361 of the PHS Act and part 1270. It became effective for all other HCT/Ps when the remaining parts of 21 C.F.R. Part 1271 were finalized.

In May 2004 the FDA published a new final rule governing the eligibility of donors of human cell and tissue products. This rule expands previous requirements for testing and screening for risks of communicable diseases that could be spread by the use of these tissues. In November 2004 the FDA published a new final rule governing the procedures and processes related to the manufacture of human cell and tissue products under the cGTPs. Both the new donor eligibility rule and the cGTP rule became effective on May 25, 2005 and designate human heart valves, processed on or after May 25, 2005, as human tissue rather than medical devices.

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It is likely that the FDA’s regulation of processed human tissue will continue to evolve in the future. Complying with FDA regulatory requirements or obtaining required FDA approvals or clearances may entail significant time delays and expenses or may not be possible, any of which may have a material adverse effect on the Company.

As discussed in “—FDA Order on Human Tissue Preservation and Other FDA Correspondence and Notices”, the Company filed an administrative appeal on an RFD submitted in October 2004 regarding SynerGraft processed cardiovascular tissue, including the CryoVein SG. On October 20, 2005 CryoLife was informed that the FDA had denied the appeal and that CryoLife will be unable to distribute CryoVein tissues with the SynerGraft technology until further submissions and FDA approvals are granted. The Company is evaluating whether it will file and seek FDA approvals for CryoVein SG or discontinue the CryoVein SG.

Possible Other FDA Regulation

Other products and processes under development by the Company are likely to be subject to regulation by the FDA. Some may be classified as medical devices or human cells and tissue products, while others may be classified as drugs or biological products or subject to a regulatory scheme that the FDA may adopt in the future. Regulation of drugs and biological products is substantially similar to regulation of Class III medical devices. Obtaining FDA approval to market these products is likely to be a time consuming and expensive process, and there can be no assurance that any of these products will ever receive FDA approval, if required, to be marketed.

NOTA Regulation

The Company’s activities in processing and transporting human hearts and certain other organs are also subject to federal regulation under the National Organ Transplant Act (“NOTA”), which makes it unlawful for any person to knowingly acquire, receive, or otherwise transfer any human organ for valuable consideration for use in human transplantation if the transfer affects interstate commerce. NOTA excludes from the definition of “valuable consideration” reasonable payments associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of a human organ. The purpose of this statutory provision is to allow for compensation for legitimate services. The Company believes that to the extent its activities are subject to NOTA, it meets this statutory provision relating to the reasonableness of its charges. There can be no assurance, however, that restrictive interpretations of NOTA will not be adopted in the future that would call into question one or more aspects of the Company’s methods of charging for its preservation services.

State Licensing Requirements

Some states have enacted statutes and regulations governing the processing, transportation, and storage of human organs and tissue. The activities engaged in by the Company require it to be licensed as a clinical laboratory and tissue bank under Georgia, New York, California, Maryland, and Florida law. The Company has such licenses, and the Company believes it is in compliance with applicable state laws and regulations relating to clinical laboratories and tissue banks that store, process, and distribute human tissue designed to be used for medical purposes in human beings. There can be no assurance, however, that more restrictive state laws or regulations will not be adopted in the future that could adversely affect the Company’s operations. Certain employees of the Company have obtained other required state licenses.

Foreign Approval Requirements

Sales of medical devices and biological products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. Approval of a product by comparable regulatory authorities of foreign countries must be obtained prior to commercial distribution of the product in those countries. The time required to obtain foreign approvals may be longer or shorter than that required for FDA approval. The EEA recognizes a single medical device approval, called a CE Mark, which allows for distribution of an approved product throughout the EEA (30 member state countries—27 European Union (“EU”) countries, and 3 European Free Trade Association (“EFTA”) countries) without additional general applications in each country. However, individual EEA members reserve the right to require additional labeling or information to address particular patient safety issues prior to allowing marketing. Third parties called Notified Bodies award the CE Mark. These Notified Bodies are approved and subject to review by the competent authorities of their respective countries. A number of countries outside of the EEA accept the CE Mark in lieu of marketing submissions as an addendum to that country’s application process. The Company has been issued CE Marks for its CryoLife O’Brien aortic heart valve, BioGlue, and SynerGraft Model 100 vascular grafts. The Company’s porcine heart valves and SynerGraft Model 100 vascular graft may be exported to more than 40 countries outside the U.S.

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Environmental Matters

The Company’s tissue processing activities generate some biomedical wastes consisting primarily of human and animal pathological and biological wastes, including human and animal tissue and body fluids removed during laboratory procedures. The biomedical wastes generated by the Company are placed in appropriately constructed and labeled containers and are segregated from other wastes generated by the Company. The Company contracts with third parties for transport, treatment, and disposal of biomedical waste. Although the Company believes it is in compliance with applicable laws and regulations promulgated by the U.S. Environmental Protection Agency and the Georgia Department of Natural Resources, Environmental Protection Division, the failure by the Company to comply fully with any such regulations could result in an imposition of penalties, fines, or sanctions, which could have a material adverse effect on the Company’s business.

Employees

As of December 31, 2006 the Company had approximately 388 employees. These employees included seven persons with Ph.D. degrees, one with an M.D. degree, and one with a D.O. degree. None of the Company’s employees are represented by a labor organization or covered by a collective bargaining agreement, and the Company has never experienced a work stoppage or interruption due to labor disputes. Management believes its relations with its employees are good.

Available Information

It is the Company’s policy to make all of its filings with the SEC including without limitation its annual reportsubsequent to the filing of our Original Filing. No other information included in our Annual Report onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including the other information set forth in Part I and all amendments to those reports filedPart II, has been modified or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), available free of charge on the Company’s website,www.cryolife.com, on the day of filing. All of such filings made on or after November 15, 2002 have been made available on the website.

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Item 1A.Risk Factors.

Risks Relating To Our Business

Overviewupdated in any way.

We have faced extraordinary challenges since we received, on August 13, 2002, an FDA Order calling for the retention, recall, and/or destruction of all non-valved cardiac, vascular, and orthopaedic tissue processed by us since October 3, 2001. The FDA Order resultedmade forward-looking statements in the destruction of much of our tissue, required that we adjust revenue for tissue recall returns, curtailed our processing activities, and subjected us to intense FDA scrutiny and additional regulatory requirements that increased costs. We also suffered decreased revenues due to lack of processing ability, and decreased market demand for our services. During the same year we were the subject of intense adverse media attention in connection with allegations that tissue that we processed had infected a man in Minnesota and caused his death. We were also the subject of shareholders’ class action and derivative shareholder suits, which were not resolved until the last half of 2005. Product liability cases and claims increased to unprecedented numbers for us, using all of our related 2002/2003 insurance policy year insurance coverage and taxing our other resources. The SEC has initiated a formal investigation which, to our knowledge, is ongoing.

These challenges have affected our revenues, increased our costs to process tissues and our operating expenses, and strained management resources. Although we resumed processing and distribution of the types of tissues subject to the FDA Order and resolved many of the product liability suits pending against us, the foregoing factors will continue to challenge us to some degree in our operations.

We Have Experienced Operating Losses And Negative Cash Flows, And We Must Continue To Address The Underlying Causes In Order To Operate Profitably And Generate Positive Cash Flows.

Due principally to factors mentioned above, we have suffered net losses in the years ended December 31, 2002 through 2005 and generated negative operating cash flow each year in the five year period ended December 31, 2006.

Our long term earnings, liquidity, and capital requirements will depend upon numerous factors, including:

The success of BioGlue and other products using related technology,

Our ability to increase the level of tissue procurement and demand for our tissue preservation services,

Our ability to maintain sufficient margins on our tissue preservation services,

Our spending levels on research and development activities, including research studies, to develop and support our service and product pipeline,

The timing and cost of resolving our remaining outstanding product liability lawsuits and other claims,

Whether we will be able to successfully transition to us the cardiovascular and vascular tissue procurement that was previously received by RTI,

To a lesser degree, our success at resolving issues with the FDA regarding processing of human tissue using the SynerGraft technology, and

Our success in implementing recently identified strategic initiatives.

If We Are Unable To Address The Causes Of Our Operating Losses And Negative Cash Flows, We Will Need To Raise Additional Capital Which May Not Be Available On Acceptable Terms Or At All.

If we are unable to address the issues facing us, and continue to experience negative cash flows, we anticipate that we will require additional financing or need to seek to raise additional funds through bank facilities, debt or equity offerings, or other sources of capital to meet liquidity and capital requirements. We may not be able to obtain additional funds when needed or on acceptable terms, which could materially and adversely affect our ability to finance and operate our business. If we issue equity capital, this may dilute the holdings of existing shareholders.

Key Growth Strategies Identified As A Result of Our Strategic Review May Not Generate the Anticipated Benefits.

In January 2006 we engaged Piper Jaffray & Co. to assist our management and Board of Directors in identifying and evaluating potential strategies to enhance shareholder value. As a result of this review, the Board of Directors has directed management to actively pursue three key strategies to generate revenue and earnings growth in addition to continuing to focus on growing our business and leveraging our strengths and expertise in our core marketplaces. These three strategies are:

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Identifying and evaluating acquisition opportunities of complementary product lines and companies,

Licensing our technology to third parties for non-competing uses, and

Analyzing and identifying underperforming assets for us to consider selling or otherwise disposing of.

Although management has begun to implement these strategies, we cannot be certain that they will ultimately enhance shareholder value.

The RTI Agreement May Not Generate The Anticipated Benefits.

As part of our strategic plan, we entered into the RTI Agreement under which we agreed to cease processing orthopaedic tissues starting JanuaryAmendment No. 1 2007 in exchange for, among other things, a non-compete agreement from RTI with respect to cardiovascular tissues and the potential for us to receive additional cardiovascular and vascular procurement which was previously being received by RTI. We may not receive the additional cardiovascular and vascular procurement that we anticipate to receive. Additionally, we may be unable to increase our cardiovascular and vascular revenues sufficiently to compensate for the loss of the orthopaedic revenues resulting from the RTI Agreement.

We May Be Unable To Comply with the Covenants Of Our Credit Facility, Which Would Limit Our Borrowing Capacity And Potentially Result In A Default Under The Credit Facility, And Our Credit Facility Limits Our Ability To Issue Additional Debt Or Pay Cash Dividends.

Our credit agreement places limitations on the amount that we may borrow, and includes various affirmative and negative covenants. In particular, we are uncertain whether we can comply with the adjusted earnings test. In the event that we do not reach the necessary level of quarterly adjusted earnings, and were required to spend our qualifying cash and cash equivalents, we anticipate that our borrowing capacity would be limited to $2.5 million.

Further, if we fail to meet this and other covenants under the facility, we may be in breach of the credit agreement, our outstanding borrowings may be accelerated, and we may lose our borrowing capacity under the credit agreement.

The credit agreement also includes conditions on incurring new indebtedness and limitations on cash dividends. These restrictions and conditions could make it more difficult or more expensive for us to borrow money.

There Are Limitations On Our Net Operating Loss Carryforwards.

We estimate that at December 31, 2006, we had approximately $48.5 million in U.S. Federal net operating loss carryforwards to offset future taxable income. These carryforwards begin to expire in the 2023 tax year. The availability of these net operating loss carryforwards is limited after an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended. Accordingly, a change in control of our Company could substantially reduce the benefit of our operating loss carryforwards. In addition, we may be unable to generate enough profits, if any, prior to the expiration of the operating loss carryforwards, to utilize our carryforwards.

We Are Significantly Dependent On Our Revenues From BioGlue And Are Subject To A Variety Of Risks Affecting This Product.

BioGlue has become a significant source of our revenues. Should the product be the subject of adverse developments with regard to its safety, efficacy, or reimbursement practices, or if a competitor’s product obtains greater acceptance, or our rights to manufacture and market this product are challenged, the result could be a material adverse effect on our business, financial condition, results of operations, and cash flows. Also, we have only two suppliers of bovine serum albumen, which is necessary for the manufacture of BioGlue. Furthermore, we presently have only one supplier for our new syringe. If we lose one or more of these suppliers, our ability to manufacture and sell BioGlue could be adversely impacted. We cannot be sure that we would be able to replace any such loss on a timely basis, if at all.

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We Continue To Feel The Adverse Impacts Of The FDA Order And Subsequent FDA Activity.

The FDA Order, subsequent FDA activity, and resulting adverse publicity materially and adversely affected our business, financial condition, results of operations, and cash flows. As a result, our revenues decreased, and we have incurred losses and negative cash flows.

In addition, as a result of the FDA Order, subsequent FDA activity, and changes in our processing, the costs of such processing have increased and are likely to remain high as compared to cost levels prior to the FDA Order. These high costs have had a material adverse effect on our business, results of operations, cash flows, and financial position and may continue to do so for some time.

The success of our tissue preservation services depends upon, among other factors, the availability of sufficient quantities of tissue from human donors. If the supply of donated human tissue is materially reduced, this would restrict our growth and adversely affect our business, results of operations, and financial condition. We rely primarily upon the efforts of third party procurement agencies, tissue banks (most of which are not-for-profit), and others to educate the public and foster a willingness to donate tissue. Because of the adverse publicity associated with the FDA Order and subsequent FDA activity and uncertainty regarding future tissue processing, some procurement agencies stopped sending tissue to us for processing. As a result, our processing has been constrained in part due to lower availability of tissue. If we are unable to obtain tissues from procurement agencies that have ceased sending tissue to us for processing, to develop new sources, or to increase the tissues shipped from our current suppliers, we may be unable to obtain adequate supplies of donated tissues to operate profitably.

Physicians Have Been And May Continue To Be Reluctant To Implant Our Preserved Tissues Or Use Our Other Products.

Some physicians or implanting institutions have been reluctant to choose our preserved tissues for use in implantation, due to a perception that they may not be safe or to a belief that the implanting physician or hospital may be subject to a heightened liability risk if our tissues are used. In addition, for similar reasons, some hospital risk managers have not allowed implanting surgeons to utilize our tissues when alternatives are available. Several risk managers and physicians have refused to use our products due to these concerns. These conditions have materially and adversely affected demand for our processed human tissues. If these conditions persist, our results of operations and cash flows will continue to be adversely affected. If additional implanting hospitals or physicians representing significant revenues refuse to use tissues that we preserve or our other products, including BioGlue, and we are unable to replace the revenues lost, our revenues and profits would be materially and adversely affected.

Our Products And The Tissues We Process Allegedly Have Caused And May In The Future Cause Injury To Patients, And We Have Been And May Be Exposed To Product Liability Claims And Additional Regulatory Scrutiny As A Result.

The processing, preservation and distribution of human allograft tissue, bovine tissue products, porcine tissue products and the manufacture and sale of medical devices entail inherent risks of medical complications for patients and have resulted and may result in product liability claims against us. Plaintiffs have asserted that our tissue or medical devices have caused a variety of injuries, including death. When patients are injured, die or have other adverse results following procedures using our tissue or medical devices, we have been and may be sued and our insurance coverage has been and may be inadequate. Adverse judgments and settlements in excess of our available insurance coverage could materially and adversely affect our financial position, results of operations and cash flows.

As a result of medical complications that are alleged to have been caused by or occur in connection with medical procedures involving our tissue or medical devices, we have been and may be subject to additional FDA and other regulatory scrutiny and inspections. For example, shortly after the FDA Order, the FDA posted a notice, now archived, on its website stating its concerns regarding our heart valve preservation services. As a result, some surgeons and hospitals decided not to use our heart valves. Cautionary statements from the FDA or other regulators regarding our tissue services or products, or negative reviews from the FDA or regulators of our processing and manufacturing facilities have decreased and may in the future decrease demand for our tissue services or products and could reduce our revenues and materially and adversely affect our business, results of operations and financial position.

In addition to the recall resulting from the FDA Order, we have in the past suspended and in the future may have to suspend the distribution of particular types of tissues as a result of reported adverse events in connection with our tissues. For

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example, during September 2003, in response to a reported infection, we halted the shipment of boned orthopaedic tissues in order to conduct an additional review of the systems in place to process and release boned orthopaedic tissues. Suspension of the distribution of, or recall of, our tissue services or medical products could materially and adversely affect our revenues and profits.

We May Be Unable To Address The Concerns Raised By The FDA In Its Form 483 Notices Of Observations.

The FDA issued Form 483 Notices of Observations in February and October 2003, in February 2004, and in August 2005. Among the issues raised in the most recent 483 were the process validations associated with the CryoValve SG, complaint handling and reporting, and root cause analysis of certain microbial testing results. If the FDA deems our responses to the most recent 483, or any future notices, unsatisfactory, it could take further action, which could materially and adversely affect our business, results of operations, financial position, or cash flows. The FDA could institute additional recalls of products, require us to perform additional tests, begin to require prescriptions for products where they are not currently required, halt the shipping or processing of products, or require additional approvals for marketing our products or services.

The FDA Has Notified Us Of Its Belief That Marketing Of CryoValve SG And CryoVein SG Require Additional Regulatory Submissions And/Or Approvals.

During 2003 the FDA notified us that it considers the application of the SynerGraft technology to allograft heart valves (CryoValve SG) to be a major manufacturing change and required us to submit a 510(k). We submitted a 510(k) for CryoValve SG and have received three requests for additional information from the FDA. While we have provided most of the requested information, we are still compiling additional information, including bench-testing and clinical data. We are also seeking to resolve certain other requests through administrative procedures at the FDA. It could be time-consuming and expensive to resolve this matter, depending in large part on the success of our efforts through the FDA’s administrative processes. We can give no assurance that the FDA will agree with us or that it will clear the CryoValve SG 510(k) in the foreseeable future, if at all. If we are unable to resolve this issue, we may not be able to offer our SynerGraft process for human heart valves.

The FDA has also determined that non-valved cardiovascular “CryoVein SG” tissues processed using our SynerGraft technology should be regulated as medical devices and that it will require additional approvals for continued distribution of these tissues. Our appeal of this designation was denied. We cannot be certain that the designation of SynerGraft cardiovascular tissue will be resolved favorably. If we are unable to resolve this matter, we may not be able to offer our SynerGraft process for non-valved cardiac tissues.

Regulatory Action Outside Of The U.S. Has Affected Our Business In The Past And May Also Affect Our Business In The Future.

After the FDA issued the FDA Order, discussed above, Health Canada also issued a recall on the same types of tissue. In addition, other countries have made inquiries regarding the tissues that we export, although these inquiries are now, to our knowledge, complete. In the event other countries raise additional regulatory concerns, we may be unable to export tissues to those countries. Revenue from international human tissue preservation services was $572,000, $193,000 and $421,000 for the years ended December 31, 2006, 2005 and 2004, respectively. We also offer BioGlue and other products for use in other countries.

Our Violation Of Government Regulations Could Result In Loss Of Revenues And Customers As Well As Additional Compliance Expense.

The FDA and some states regulate the facilities and processes that we use. Our facilities are also subject to periodic inspection by the FDA and state regulatory authorities to ensure our compliance with applicable laws and regulations. If we fail to comply with these laws and regulations, we can be subject to sanctions, such as written observations of deficiencies made following inspections, warning letters, product recalls, fines, product seizures and consent decrees, all of which would be made available to the public. Such actions and publicity could affect our ability to sell our products and services. In the past, the FDA has sent us notifications and warning letters relating to deficiencies in our compliance with FDA requirements. We were required to take measures to respond. We also were subject to the FDA Order, which decreased our revenues, increased our processing costs, and materially and adversely affected our business, results of operations, and financial condition. We cannot be certain that the FDA or state regulatory authorities will not request that we take additional steps to correct deficiencies that may be raised in the future. Correcting any such deficiencies could materially and adversely affect our business.

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We Are The Subject Of An SEC Investigation.

The SEC notified us in July 2003 that its informal inquiry became a formal investigation in June 2003. We have cooperated with this investigation both before and after issuance of the formal order of investigation in June 2003, and intend to continue doing so. We voluntarily reported the names of six employees and former employees to the SEC in December 2002 after discovering they had apparently sold CryoLife shares on August 14, 2002 before trading was halted pending our press release reporting the FDA Order. These individuals were not then and are not currently executive officers of our Company. The formal order of investigation indicates that the SEC’s scope includes whether, during 2002, among other things, we or others may have traded while in possession of material nonpublic information, made (or caused to be made) false or misleading statements or omissions in press releases and SEC filings, and failed to maintain accurate records and adequate controls. The investigation could also encompass matters not specifically identified in the formal order. On September 15, 2005, the SEC announced that it had commenced proceedings in federal district court against certain of the above-referenced former and current employees (and certain of their spouses) for alleged illegal insider trading arising out of their August 14, 2002 trading activities. Those proceedings resulted in settlements with the SEC. As of the date hereof, the SEC has had no discussions with our representatives as to whether the SEC will seek relief against us, or the nature of any relief that it may seek. At present, we are unable to predict the ultimate focus or outcome of the investigation, what the current status of the investigation may be, or when the SEC will complete it. An unfavorable outcome could result in monetary or other penalties and could materially and adversely affect our reputation, business, financial position, results of operations, and cash flows.

Our Existing Insurance Policies May Not Be Sufficient To Cover Our Actual Claims Liability.

Our products and the tissues we process allegedly have caused and may in the future cause injury to patients using our products or tissues and we have been and may be exposed to product liability claims.

Following the FDA Order, product liability lawsuits increased to unprecedented numbers for us. These claims involved assertions that infections and related morbidity, including death, were the result of inadequacies in our procedures. We maintain claims-made insurance policies to mitigate our financial exposure to product liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period.

As of February 16, 2007, we were aware of three pending product liability lawsuits against us. Two of these lawsuits are not covered by insurance because the claimed loss date was prior to the effective coverage date for the insurance policy. Additional uninsured claims may be filed in the future. Other product liability claims have been asserted against us that have not resulted in lawsuits. We are monitoring these claims.

Our December 31, 2006 Consolidated Balance Sheet reflects a liability in the amount of approximately $330,000 for the estimated cost of resolving these claims. The amounts recorded were estimates, and do not reflect actual settlement arrangements or final judgments, the latter of which could include punitive damages, nor do they represent cash set aside for the purpose of making payments. This balance sheet also reflects a $6.6 million liability included as a component of accrued expenses and other current liabilities of $3.3 million and other long-term liabilities of $3.3 million for the estimated cost of resolving unreported product liability claims. Our product liability insurance policies do not include coverage for any punitive damages. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Product Liability Claims” for a description of our accounting treatment for product liability claims.

Several putative class action lawsuits were filed in July through September 2002 against us and certain of our officers, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, based on a series of purportedly materially false and misleading statements to the market. On July 21, 2005 we reached an agreement in principle to settle the securities class action lawsuit and the settlement became final later in the year. In August 2002 and January 2003 purported shareholder derivative actions were filed. These lawsuits, which named us as a nominal defendant, alleged that the individual defendants breached their fiduciary duties to the Company by causing or allowing the Company to engage in certain inappropriate practices that caused the Company to suffer damages. A settlement was also reached in those cases and became

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final in 2005. Our insurance proceeds were insufficient to fund the costs of defending and settling the securities class action and derivative lawsuits. In September 2006 we settled insurance coverage disputes with former insurance carriers for $2.1 million, net of associated legal fees. The disputes involved losses stemming from approximately $11.3 million that we paid in 2005 in settlement of outstanding claims. No party admitted any liability as part of the September 2006 settlement. The $2.1 million is included as a component of general, administrative, and marketing expenses on the Consolidated Statements of Operations as of December 31, 2006. We received the net proceeds of $2.1 million in October 2006.

If we are unsuccessful in arranging acceptable settlements of product liability, securities class action, or derivative claims, we may not have sufficient insurance coverage and liquid assets to meet these obligations. Additionally, if one or more claims in which we are a defendant, whether now pending or hereafter arising, should be tried with a substantial verdict rendered in favor of the plaintiff(s), such verdict(s) could exceed our available insurance coverage and liquid assets. If we are unable to meet required future cash payments to resolve the outstanding or any future claims, this will materially and adversely affect our financial position, results of operations, and cash flows. Further, if the costs of pending or unreported but incurred product liability claims exceed our current estimates, our business, financial condition and results of operations may be materially and adversely affected. If we do not have sufficient resources to pay the claims against us, we may be forced to cease operations or seek protection under applicable bankruptcy laws.

We May Be Unable To Obtain Adequate Insurance At A Reasonable Cost, If At All.

If we are unable to obtain satisfactory insurance coverage in the future, we may be subject to additional future exposure from product liability claims. Additionally, insurance rates may be significantly higher than in the past, and insurers may provide less coverage, which may adversely impact our profitability. Unlike the prior year’s policy, the 2003/2004 products liability policy did not cover any claims which arose prior to the insurance policy year. The 2004/2005 products liability policy was a two-year claims-made policy, covering claims arising since the commencement of the 2003/2004 policy year. The 2005/2006 products liability policy was a three-year claims-made policy, covering claims arising since the commencement of the 2003/2004 policy year. Our current products liability insurance policy is a four-year claims-made policy covering claims since the commencement of the 2003/2004 policy year and expires in March 2007. We are currently evaluating with prospective insurers the available coverage and cost for products liability insurance. It is possible that there could be increases in both cost and retention, although we expect the coverage to be a five-year claims-made policy. We are also currently evaluating with prospective insurers available coverage and cost for director’s and officer’s insurance policies which expire in April 2007. We cannot be certain that we will be successful in obtaining satisfactory coverage once our current coverage expires, which could adversely impact our liquidity if we suffer material uninsured claims liability.

Intense Competition May Affect Our Ability To Operate Profitably.

We face competition from other companies that process human tissue, as well as companies that market mechanical valves and synthetic and animal tissue for implantation, and companies that market surgical adhesives and surgical sealants. Management believes that at least three domestic tissue banks offer preservation services for allograft heart valves and many companies offer processed porcine heart valves and mechanical heart valves. A few companies dominate portions of the mechanical, porcine and bovine heart valve markets, including St. Jude Medical, Inc., Medtronic, Inc., and Edwards Life Sciences. Our BioGlue product competes with other surgical adhesives and surgical sealants, including Baxter Healthcare’s Tisseel, FloSeal, and CoSeal, Ethicon’s Evicel and Surgifoam, and Tyco Healthcare’s U.S. Surgical Division’s Duraseal products. We are also aware that a few companies have surgical adhesive products under development. For example, Closure Medical is in clinical trials for a surgical adhesive for approval in vascular sealing that could compete with BioGlue in certain applications. Other large medical device, pharmaceutical, and biopharmaceutical companies may also be developing competitive products. Many of our competitors have greater financial, technical, manufacturing, and marketing resources than we do and are well established in their markets. We have increased fees and prices on a number of our services and products since January 1, 2007. This increase may provide an opportunity for our competitors to gain market share. If we are unable to increase prices as planned and retain or improve our market share, our revenue and return to profitability may be adversely affected.

Our cryopreserved tissues compete with other entities that cryopreserve human tissue on the basis of technology, customer service, and quality assurance. Our competitors have been favorably impacted and we believe we have lost some market share because our procurement and processing yields of human tissue and our cardiovascular and vascular tissue shipments decreased following the FDA Order in 2002.

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We believe that the human heart valves cryopreserved by us, as compared to mechanical, porcine, and bovine heart valves, compete on the factors set forth above. We also believe that our cryopreserved human heart valves compete by providing a tissue that is the preferred replacement alternative with respect to certain medical conditions, including:

Pediatric cardiac reconstruction,

Valve replacements for women in their child-bearing years, and

Valve replacements for patients with endocarditis.

Our BioGlue product competes on the basis of its high tensile strength and ease of use.

We cannot give assurance that our products and services will be able to compete successfully. Any products that we develop that gain regulatory clearance or approval will have to compete for market acceptance and market share. If we fail to compete effectively, this could materially and adversely affect our business, financial condition, results of operations, and cash flows. The FDA Order, related adverse publicity, and subsequent FDA activity have adversely affected our competitive position and may continue to do so in the future. Our competitors may gain competitive advantages that may be difficult to overcome.

We May Not Be Successful In Obtaining Necessary Clinical Results And Regulatory Approvals For Products And Services In Development, And Our New Products And Services May Not Achieve Market Acceptance.

Our growth and profitability will depend, in part, upon our ability to complete development of and successfully introduce new products and services, including new applications of our BioGlue and related technology and applications applying our SynerGraft technology. We are uncertain whether we can develop new products and services to a commercially acceptable form. We must also expend much time and money to obtain the required regulatory approvals. For example, if we are unable to resolve the issues we are addressing with the FDA with regard to tissues processed using SynerGraft, we may incur significant costs over a lengthy period of time to meet the FDA’s requirements. We may not be able to meet the FDA’s requirements, and we may not be able to offer a commercially successful product.

Although we have conducted pre-clinical studies on certain products under development which indicate that such products may be effective in a particular application, we cannot be certain that the results we obtain from expanded clinical studies will be consistent with earlier trial results or be sufficient for us to obtain any required regulatory approvals or clearances. We cannot give assurance that we will not experience difficulties that could delay or prevent us from successfully developing, introducing and marketing new products. We also cannot give assurance that the regulatory agencies will clear or approve these or any new products on a timely basis, if ever, or that the new products will adequately meet the requirements of the applicable market or achieve market acceptance.

Our ability to complete the development of any of our products is subject to all of the risks associated with the commercialization of new products based on innovative technologies. Such risks include unanticipated technical or other problems, manufacturing difficulties, and the possibility that we have allocated insufficient funds to complete such development. Consequently, we may not be able to successfully develop or manufacture our products which are under development. If we do develop or manufacture these products, we may not do so on a timely basis. These products may not meet price or performance objectives, and may not prove to be as effective as competing products.

If we are unable to successfully complete the development of a product, application or service, or if we determine, for financial, technical or other reasons, not to complete development or obtain regulatory approval of any product, application or service, particularly in instances when we have expended significant capital, this could materially and adversely affect our business, financial condition, results of operations, and cash flows. Research and development efforts are time consuming and expensive and we cannot be sure that these efforts will lead to commercially successful products or services. Even the successful commercialization of a new service or product in the medical industry can be characterized by slow growth and high costs associated with marketing, under-utilized production capacity, and continuing research and development and education costs. The introduction of new products or services, which could include new products based on our Protein Hydrogel Technology such as BioFoam, BioLastic and BioDisc, may require significant physician training and years of clinical evidence derived from follow-up studies on human implant recipients in order to gain acceptance in the medical community.

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Investments In New Technologies Or Distribution Rights May Not Be Successful.

We may invest in new technology licenses or distribution rights that may not succeed in the marketplace. In such cases, we may be unable to recover our initial investment, which could include acquiring license or distribution rights or purchasing initial inventory. Inability to recover our initial investment may adversely impact our profitability.

We May Be Unable To Fund Our ACT Technology.

The ACT is a reversible linker technology that has potential uses in the areas of fibrinolysis (blood clot dissolving) and other drug delivery applications. In February 2001 we formed AuraZyme, a wholly-owned subsidiary, in order to seek a corporate collaboration or to complete a potential private placement of equity or equity-oriented securities to fund the commercial development of the ACT. We have been seeking such funding since 1998 to allow us to continue developing this technology without incurring additional research and development expenditures, other than through AuraZyme. We cannot guarantee that we can obtain such funding on acceptable terms, if at all. Even if we can obtain such financing, we cannot guarantee that the ACT will in fact prove to be effective in the above applications. In addition, any new financing may dilute the ownership interests of our current shareholders, or may include restrictive covenants that could adversely affect us or our business.

SynerGraft Processed Tissues May Not Demonstrate Expected Benefits.

We process bovine tissues with the SynerGraft technology and market these services outside the U.S. The process involves antigen reduction, which is the depopulation of the cells of the tissue to be implanted, leaving a matrix of protein fibers that has the potential to be repopulated with the recipient’s cells. If successful, we believe that such repopulation may increase graft longevity and improve the biocompatibility and functionality of such tissue, resulting in the implanted tissue behaving more like the recipient’s own tissue. Studies on animals have shown that explanted SynerGraft processed heart valves will repopulate with the recipient’s cells. However, should such tissues implanted in humans not consistently and adequately repopulate with the human host cells, the higher priced SynerGraft processed tissues may not demonstrate benefits over other alternatives. If this happens, it could materially and adversely affect our future expansion plans and could limit our future growth.

If We Are Not Successful In Expanding Our Business Activities In International Markets, We Will Not Be Able To Pursue One Of Our Strategies For Increasing Our Revenues.

Our international operations are subject to a number of risks which may vary from the risks we face in the U.S., including:

Unexpected changes in regulatory requirements and tariffs;

Difficulties and costs associated with staffing and managing foreign operations, including foreign distributor relationships;

Longer accounts receivable collection cycles in certain foreign countries;

Adverse economic or political changes;

More limited protection for intellectual property in some countries;

Changes in our international distribution network and direct sales force;

Changes in currency exchange rates;

Potential trade restrictions, exchange controls and import and export licensing requirements; and

Potentially adverse tax consequences of overlapping tax structures.

We Are Dependent On Our Key Personnel.

Our business and future operating results depend in significant part upon the continued contributions of our key technical personnel and senior management, many of who would be difficult to replace. Our business and future operating results also depend in significant part upon our ability to attract and retain qualified management, processing, technical, marketing, sales, and support personnel for our operations. Competition for such personnel is intense and we cannot promise that we will be successful in attracting and retaining such personnel. Our key employees include our management team, consisting of:

Steven G. Anderson, President, Chief Executive Officer, and Chairman;

D. Ashley Lee, CPA, Executive Vice President, Chief Operating Officer, and Chief Financial Officer;

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Albert E. Heacox, Ph.D., Senior Vice President, Research and Development;

Gerald B. Seery, Senior Vice President Sales and Marketing; and

David M. Fronk, Vice President, Regulatory Affairs and Quality Assurance.

We do not have key life insurance on these individuals. If we lose any key employees, if any of our key employees fail to perform adequately, or if we are unable to attract and retain skilled employees as needed, this could materially and adversely affect our ability to efficiently operate our business.

Extensive Government Regulation May Adversely Affect Our Ability To Develop And Sell Products And Services.

Government regulation in the U.S., the EEA, and other jurisdictions can determine the success of our and our competitors’ efforts to market and develop services and products. The FDA, pursuant to rules it promulgated under the Public Health Services Act, currently regulates allograft tissues as “human tissue.” These rules establish requirements for donor testing and screening of human tissue and record keeping relating to these activities and impose certain registration and product listing requirements on establishments that process or distribute human tissue or cellular-based products. The FDA has finalized and implemented good tissue practice regulations akin to good manufacturing practices, which must be followed by tissue banks and processors of human tissue. These good tissue practice regulations will increase regulatory oversight of CryoLife and other processors of human tissue. Although we and our competitors are endeavoring to satisfy the new regulations when they go into effect, there can be no assurance of success.

BioGlue is regulated as a Class III medical device, and we believe that our ACT may be regulated as a biologic or drug by the FDA. The ACT has not been approved for commercial distribution in the U.S. or elsewhere. Fixed porcine heart valve products are classified as Class III medical devices. We may not obtain the FDA approval required to distribute our porcine heart valve products in the U.S. Whether we are able to distribute these products within the EEA will depend on whether we can maintain the CE Mark for these products and their ISO 13485 certifications, of which we cannot be certain.

Most of our products and services in development and those of our competitors, if successfully developed, will require regulatory approvals from the FDA and perhaps other regulatory authorities before they may be commercially distributed. The process of obtaining required regulatory approvals from the FDA normally involves clinical trials as well as an extensive premarket approval application and often takes many years. The process is expensive and can vary significantly based on the type, complexity, and novelty of the product. We cannot give any assurance that any products developed by us or our competitors, independently or in collaboration with others, will receive the required approvals for manufacturing and marketing.

Delays in obtaining U.S. or foreign approvals could result in substantial additional cost and adversely affect our competitive position. The FDA may also place conditions on product approvals that could restrict commercial applications of our products. The FDA may withdraw product marketing approvals or clearances if we do not maintain compliance with regulatory standards or if problems occur following initial marketing. Delays imposed by the governmental clearance process may materially reduce the period during which we have the exclusive right to commercialize patented products.

Delays or rejections may also be encountered by us during any stage of the regulatory approval process if clinical or other data fails to satisfactorily demonstrate compliance with, or if the product fails to meet, the regulatory agency’s requirements for safety, efficacy and quality. Those requirements may become more stringent due to changes in applicable law, regulatory agency policy, or the adoption of new regulations. Clinical trials may also be delayed due to unanticipated side effects, inability to locate, recruit, and qualify sufficient numbers of patients, lack of funding, the inability to locate or recruit clinical investigators, the redesign of clinical trial programs, the inability to manufacture or acquire sufficient quantities of the particular product or any other components required for clinical trials, changes in development focus, and disclosure of trial results by competitors.

Even if we or one of our competitors are able to obtain regulatory approval for any products or services offered, the scope of the approval may significantly limit the indicated usage for which such products or services may be marketed. The unapproved use of our products or our preserved tissues could adversely affect the reputation of our products or services. Products or services marketed pursuant to FDA or foreign oversight or approvals are subject to continuing regulation. In the U.S., devices and biologics must be manufactured in registered establishments, and, in the case of biologics, licensed establishments, and must be produced in accordance with Quality System Regulations. Manufacturing facilities and processes are subject to periodic FDA inspection. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The export of devices and biologics is also subject to regulation and

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may require FDA approval. From time to time, the FDA may modify such regulations, imposing additional or different requirements. If we fail to comply with applicable FDA requirements, which may be ambiguous, we could face civil and criminal enforcement actions, warnings, citations, product recalls or detentions and other penalties. This could materially and adversely affect our business, financial condition, results of operations, and cash flows. As noted above, the FDA Order and subsequent FDA activity had, and may continue to have, such an effect.

In addition NOTA prohibits the acquisition or transfer of human organs for “valuable consideration” for use in human transplantation. NOTA permits the payment of reasonable expenses associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of human organs. We cannot be certain that restrictive interpretations of NOTA will not be adopted in the future which will challenge one or more aspects of industry methods of charging for preservation services. Our laboratory operations and those of our competitors are subject to the U.S. Department of Labor, Occupational Safety and Health Administration and Environmental Protection Agency requirements for prevention of occupational exposure to infectious agents and hazardous chemicals and protection of the environment. Some states have enacted statutes and regulations which govern the processing, transportation and storage of human organs and tissue.

U.S. and foreign governments and regulatory agencies may adopt more restrictive laws or regulations in the future that could materially and adversely affect our business, financial condition, results of operations, and cash flows.

Uncertainties Related To Patents And Protection Of Proprietary Technology May Adversely Affect The Value Of Our Intellectual Property.

We own several patents, patent applications, and licenses relating to our technologies, which we believe provide us with important competitive advantages. We cannot be certain that our pending patent applications will issue as patents or that no one will challenge the validity or enforceability of any patent that we own. We also cannot be certain that if anyone does make such a challenge, that we will be able to successfully defend that challenge. We may have to incur substantial litigation costs to uphold the validity and prevent infringement of a patent. Furthermore, we cannot be certain that competitors will not independently develop similar technologies or duplicate our technologies or design around the patented aspects of such technologies. We cannot be sure that our proposed technologies will not infringe patents or other rights owned by others.

We protect our proprietary technologies and processes in part by confidentiality agreements with our collaborative partners, employees and consultants. We cannot be sure that these entities and persons will not breach these agreements, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently discovered by competitors. If any of these events occur, they could result in our loss of the economic benefits associated with our key products and services and could materially and adversely affect our business, financial condition, results of operations, and cash flows.

Future Health Care Reimbursement Methods And Policies May Affect The Availability, Amount And Timing Of Our Revenues.

Even though we do not receive payments directly from third-party health care payors, their reimbursement methods and policies impact demand for our cryopreserved tissue and other services and products. Our preservation services with respect to the cardiac, vascular, and orthopaedic tissues may be particularly susceptible to third-party cost containment measures. For example, the initial cost of a cryopreserved allograft heart valve generally exceeds the cost of a mechanical, synthetic, or animal-derived valve. We are unable to predict what changes will be made in the reimbursement methods and policies utilized by third-party health care payors or their effect on us.

If third-party health care payors, including Medicare, change their reimbursement methods and policies with respect to cryopreserved tissues provided for implant by us and other services and products that we offer, this could have a material adverse effect on us. Significant uncertainty exists as to the reimbursement status of newly approved health care products and services, and there can be no assurance that adequate third-party coverage will be available for us to maintain price levels sufficient to realize an appropriate return on our investment in developing new products.

Government, hospitals, and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new products approved for marketing by the FDA. In some cases, these entities refuse to provide any coverage for uses of approved products for indications for which the FDA has not granted marketing approval. If government and other third-party payors do not provide adequate coverage and reimbursement levels for uses of our new products and services, market acceptance of these products would be adversely affected, which could negatively impact revenue growth and materially and adversely affect our business, financial condition, results of operations, and cash flows.

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Rapid Technological Change Could Cause Our Services And Products To Become Obsolete.

The technologies underlying our products and services are subject to rapid and profound technological change. Competition intensifies as technical advances in each field are made and become more widely known. We can give no assurance that others will not develop products or processes with significant advantages over the products and processes that we offer or are seeking to develop. Any such occurrence could materially and adversely affect our business, financial condition, results of operations, and cash flows.

Risks Related To Our Capital Stock

Trading Prices For Our Securities Have Been, And May Continue To Be, Volatile.

The trading price of our common and preferred stock has been subject to wide fluctuations and may continue to be volatile in the future. Trading price fluctuations can be caused by a variety of factors, including variations in operating results, regulatory actions such as the adverse FDA activity, product liability claims, announcement of technological innovations or new products by us or our competitors, governmental regulatory acts, developments with respect to patents or proprietary rights, general conditions in the medical device or service industries, actions taken by government regulators, changes in earnings estimates by securities analysts, or other events or factors, many of which are beyond our control. If our revenues or operating results in future quarters fall below the expectations of securities analysts and investors, the price of our common and preferred stock would likely decline, perhaps substantially. Changes in the trading price of our common and preferred stock may bear no relation to our actual operational or financial results. If our share prices do not meet the requirements of the New York Stock Exchange, our shares may be delisted. Our closing common stock price in the period January 1, 2004 to February 16, 2007 has ranged from a high of $9.35 to a low of $2.99. Our closing preferred stock price in the period March 15, 2005, the date of our first preferred stock issuance, to February 16, 2007 has ranged from a high of $67.00 to a low of $35.00.

The market prices of the securities of biotechnology companies have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, companies that experienced volatility in the market price of their securities have often faced securities class-action litigation. Moreover, market prices for stocks of biotechnology-related and technology companies frequently reach levels that bear no relationship to the operating performance of these companies. These market prices generally are not sustainable and are highly volatile. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our financial condition and results of operations.

Anti-Takeover Provisions May Discourage Or Make More Difficult An Attempt To Obtain Control Of CryoLife.

Our Articles of Incorporation and Bylaws contain provisions that may discourage or make more difficult any attempt by a person or group to obtain control of our company, including provisions authorizing the issuance of preferred stock without shareholder approval, restricting the persons who may call a special meeting of the shareholders, and prohibiting shareholders from taking action by written consent. In addition, we are subject to certain provisions of Florida law that may discourage or make more difficult takeover attempts or acquisitions of substantial amounts of our common stock. Further, pursuant to the terms of a shareholder rights plan adopted in 1995 and amended in 2005, each outstanding share of common stock has one attached right. The rights will cause substantial dilution of the ownership of a person or group that attempts to acquire our company on terms not approved by the Board of Directors and may deter hostile takeover attempts. These provisions could potentially deprive our stockholders of opportunities to sell shares of our stock at above-market prices.

We Are Not Likely To Pay Common Stock Dividends In The Foreseeable Future, And We May Not Be Able To Pay Cash Dividends On Our Capital Stock Due To Legal And Contractual Restrictions And Lack Of Liquidity.

We have not paid, and do not presently intend to pay, cash dividends on our common stock. In addition, under Florida law and under the restrictions set forth in our credit agreement, we may not be able to pay cash dividends on our capital stock. Under Florida law, no distribution may be paid on our capital stock, if after giving it effect:

We would not be able to pay our debts as they become due in the usual course of business; or

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Our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of our preferred shareholders whose preferential rights are superior to those receiving the distribution.

Under our new credit agreement, cash dividends on common stock are prohibited, and cash dividends on preferred stock may be paid only so long as we maintain at least $7.5 million, in the aggregate, of borrowing capacity under the credit agreement plus cash, and specified cash equivalents, see “Risks Factors—Risks Relating To Our Business—We May be Unable to Comply with the Covenants of Our Credit Facility, Which Would Limit Our Borrowing Capacity and Potentially Result in a Default Under the Credit Facility, And Our Credit Facility Limits Our Ability To Issue Additional Debt Or Pay Cash Dividends.” Increased borrowings under the credit agreement and judgments or settlements arising out of product liability or other claims, negative operating cash flow and other factors which adversely affect available cash resources, will also adversely affect our ability to make cash dividend payments both generally and under the credit agreement. In addition, the terms of any future financing arrangements that we may enter into may also restrict our ability to pay dividends.

Forward-Looking Statements

This Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give the Company’sour current expectations or forecasts of future events. The words “could,” “may,” “might,” “will,” “would,” “shall,” “should,” “pro forma,” “potential,” “pending,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “future,” and other similar expressions generally identify forward-looking statements, including, in particular, statements regarding future products or services, market expansion, revenues, cost savings, procurement, tissue processing yields, regulatory activity, available funds and capital resources, and pending litigation.forwarding-looking statements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements, which are as of their respective dates.statements. Such forward-looking statements reflect the views of management at the time such statements are made and are subject to a number of risks, uncertainties, estimates, and assumptions, including, without limitation, in addition to those identified in the text surrounding such statements, those identified under Part I, Item 1A.1A, “Risk Factors” and elsewhere in our Original Filing and in this Form 10-K.

All statements, other than statements of historical facts, included herein that address activities, events or developments that the Company expects or anticipates will or may occur in the future, are forward-looking statements, including statements regarding:Amendment No. 1.

 

The adequacy of product liability insurance to defend against lawsuits;

Increases in product liability insurance coverage costs, retention, and claims years covered;

The outcome of lawsuits filed against the Company, and of the SEC investigation;

The impact of the FDA Order and subsequent FDA activity, including the FDA’s letters regarding the SynerGraft process and measures taken by the Company as a result, on future revenues, profits, and business operations;

The impact of the FDA’s Form 483 Notices of Observation;

The Company’s estimated future liability for existing product liability lawsuits and for product liability claims incurred but not yet reported;

The Company’s ability to increase yields and reduce its costs of tissue preservation services;

The Company’s competitive position, including the impact of price increases;

The receipt of governmental grants for BioFoam development;

The results of patient studies and their use in applying for governmental approval for products and services;

The outcome of the Company’s regulatory applications regarding its SynerGraft process;

34


Future increases in research and development expenses;

Competitive advantages offered by the Company’s patents, trade secrets, trademarks, and technology licensing rights;

Product demand and market growth;

The success of the RTI Agreement, including anticipated cost savings and increased procurement of cardiovascular and vascular tissues;

The potential of the ACT for use in fibrinolysis (blood clot dissolving) and other drug delivery applications;

Expected revenue and earnings growth from recently announced strategic agreements;

Expected impact of adoption of new accounting pronouncements;

The impact on the Company of adverse publicity or negative surgical outcomes from products or services provided by the Company;

Anticipated future revenues and expenses;

Expected seasonality trends;

Anticipated decreases in cash payments related to the defense and resolution of lawsuits and claims from the levels seen in 2003 through 2006;

Anticipated impact of changes in interest rates;

The ability to expand the Company’s service and product offerings;

The success of distribution, supplier and development agreements with third parties to distribute, supply and develop various Company, as well as third party, products and services;

Those issues most likely to impact the Company’s future financial performance and cash flows;

The Company’s ability to implement its strategic plans;

The adequacy of the Company’s financial resources and its ability to borrow under its credit facility; and

Other statements regarding future plans and strategies, anticipated events, or trends.

These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the Company’s expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from the Company’s expectations, including the risk factors discussed in this Form 10-K and other factors, many of which are beyond the control of CryoLife. Consequently, all of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. The Company assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise.

35


Item 1B.Unresolved Staff Comments.

The Company has no unresolved written comments received from the staff of the Securities and Exchange Commission regarding its periodic or current reports under the Securities Exchange Act of 1934 not less than 180 days before December 31, 2006 (the end of the fiscal year to which this Form 10-K relates).PART III

 

Item 2.10.Properties.Directors, Executive Officers, and Corporate Governance.

The Company’s facilities are locatedExecutive Officers

Executive Officers—See the section entitled “Executive Officers of the Registrant” in suburban Atlanta, Georgia, and in Guildford, United Kingdom. The corporate headquarters in AtlantaPart I, Item 4A of the Original Filing.

Directors

Our board of directors consists of approximately 200,000 square feet of leased manufacturing, administrative, laboratory, and warehouse space with an additional 7,600 square feet of offsite warehouse space. Approximately 26,000 square feet are dedicated to clean room work areas.eight (8) directors. The primary facility has six main laboratory facilities: human tissue processing, BioGlue manufacturing, bioprosthesis manufacturing, research and development, microbiology, and pathology. Each of these areas consists of a general technician work area and adjoining “clean rooms” for work with human tissue and for aseptic processing. The clean rooms are supplied with highly filtered air that provides a near-sterile environment. The human tissue processing laboratory contains approximately 15,600 square feet with a suite of nine clean rooms. The current processing level is estimated to be at about 20% of total capacity. The volume of tissue processed is currently constrained by the availability of tissue. To increase the current processing levels, the Company could increase the number of employees, expand its second and third shift, and add equipment. The BioGlue manufacturing laboratory contains approximately 13,500 square feet with a suite of six clean rooms. The current processing level is about 5% of total capacity. To produce at full capacity levels, the Company would need to increase the number of employees, add work shifts, and install automated filling and pouching equipment. The bioprosthesis manufacturing laboratory contains approximately 20,000 square feet with a suite of six clean rooms. The research and development laboratory is approximately 10,500 square feet with a suite of five clean rooms. The microbiology laboratory is approximately 8,000 square feet with a suite of five clean rooms. The pathology laboratory is approximately 1,100 square feet. The Europa facility located in Guildford, United Kingdom contains approximately 3,400 square feet of leased office and warehousing space.

Item 3.Legal Proceedings.

Product Liability Claims

In the normal course of business as a medical device and services company, the Company has product liability complaints filed against it. As of February 16, 2007 the Company was aware of three pending product liability lawsuits. The lawsuits are currently in the pre-discovery or discovery stages. Of these lawsuits, two allege product liability claims arising out of the Company’s allograft heart valve tissue services, and one alleges a product liability claim arising from the Company’s allograft orthopaedic tissue services.

Two of the outstanding product liability lawsuits against the Company are not covered by insurance, as the claimed loss date was prior to the effective coverage date for its insurance policy. Additional uninsured claims may be filed in the future. Other product liability claims have been asserted against the Company that have not resulted in lawsuits as of February 16, 2007. The Company is monitoring these claims.

The Company performed an analysisfollowing table sets forth certain information regarding our directors, including their ages as of December 31, 20062015. Except for our President, Chief Executive Officer and Chairman of the settled but unpaid claimsBoard, J. Patrick Mackin, none of our directors holds any other position or office with CryoLife.

Name

  Director
Since
  Age

Thomas F. Ackerman

  2003  61

James S. Benson

  2005  76

Daniel J. Bevevino

  2003  56

Ronald C. Elkins, M.D.

  1994  79

Ronald D. McCall, Esq.

  1984  79

J. Patrick Mackin

  2014  49

Harvey Morgan

  2008  73

Jon W. Salveson

  2012  50

Biographical Information

Thomas F. Ackerman has served as a Director of CryoLife since December 2003. Mr. Ackerman was formerly a Senior Financial Advisor of Charles River Laboratories International, Inc. (NYSE: CRL), a position he held from August 2015 until February 2016. Charles River Laboratories is a leading global provider of solutions that accelerate the early-stage drug discovery and development process, with a focus onin vivo biology, including research models and services required to enablein vivo drug discovery and development. From 2005 to 2015, he served as Executive Vice President and Chief Financial Officer, from 1999 to 2005, he served as Senior Vice President and Chief Financial Officer, and from 1996 to 1999, he served as Vice President and Chief Financial Officer of Charles River Laboratories, where he has been employed since 1988. Mr. Ackerman retired from Charles River Laboratories in 2016. Mr. Ackerman is a Director of the pending product liability claims basedUniversity of Massachusetts Amherst Foundation. Mr. Ackerman received a B.S. in Accounting from the University of Massachusetts and became a certified public accountant in 1979 (his license is currently inactive).    

The Board of Directors has determined that Mr. Ackerman should serve as a Director of CryoLife because of his expertise in accounting and financial reporting, particularly in the biotechnology industry.

James S. Benson has served as a Director of CryoLife since December 2005. Mr. Benson retired from the Advanced Medical Device Association (“AdvaMed”, formerly known as The Health Industry Manufacturers Association, “HIMA”) in July 2002 as Executive Vice President for Technical and Regulatory Affairs. He was employed by AdvaMed from January 1993 through June 2002. Prior to that, he was employed by the Food and Drug Administration (“FDA”) for 20 years, where he held a number of senior positions. He retired from the FDA as Director of the Center for Devices and Radiological Health (“CDRH”) in December of 1992. Prior to his position as Center Director, he served as Deputy Commissioner from July 1988 through July 1991. During that period, he served as Acting Commissioner for one year, from December 1989 through November 1990. Prior to his position as

Deputy Commissioner, he served as Deputy Director of the CDRH from 1978 to 1982. He served as a director and presiding director of Cytomedix from 2004 through 2013. Mr. Benson received a B.S. in Civil Engineering from the University of Maryland in 1962 and an M.S. in Nuclear Engineering from the Georgia Institute of Technology in 1969.

The Board of Directors has determined that Mr. Benson should serve as a Director of CryoLife because of his past business experience in the biotechnology and medical device industries, from both an FDA and industry perspective; his distinguished tenure with the FDA, as well as the particular knowledge and expertise he acquired in these positions with respect to regulatory issues in the healthcare field; and his experience as a director and committee chair.

Daniel J. Bevevino has served as a Director of CryoLife since December 2003. From 1996 until March of 2008, Mr. Bevevino served as the Vice President and Chief Financial Officer of Respironics, Inc. (NASDAQ: RESP), a company that develops, manufactures, and markets medical devices used primarily for the treatment of patients suffering from sleep and respiratory disorders, where he was employed since 1988. In March 2008, Respironics was acquired by Royal Philips Electronics (NYSE: PHG), whose businesses include a variety of medical solutions including medical diagnostic imaging and patient monitoring systems, as well as businesses focused on settlement negotiationsenergy efficient lighting and consumer products. From March 2008 to date and advice from counsel. As of December 31, 20062009, Mr. Bevevino was employed by Philips as the Company had accrued a totalHead of approximately $330,000 for pending product liability. The $330,000 accrualPost-Merger Integration – Respironics, as well as in various operating capacities, to help facilitate the integration of the combined companies. He is includedcurrently an independent consultant providing interim chief financial officer services in the life sciences industry, and he currently serves as a componentdirector of accrued expenses and other current liabilities on the December 31, 2006 Consolidated Balance Sheet. This amount represents the Company’s estimate of the probable losses related to one of the three pending product liability claims. companies for which he provides services. He began his career as a certified public accountant with Ernst & Young LLP (his license is currently inactive). Mr. Bevevino received a B.S. in Business Administration from Duquesne University and an MBA from the University of Notre Dame.

The CompanyBoard of Directors has not recorded an accrualdetermined that Mr. Bevevino should serve as a Director of CryoLife because of his expertise in accounting and financial reporting, particularly in the medical device industry.

Ronald C. Elkins, M.D. has served as a Director of CryoLife since January 1994. Dr. Elkins is Professor Emeritus, Section of Thoracic and Cardiovascular Surgery, University of Oklahoma Health Sciences Center. Dr. Elkins has been a physician at the Health Science Center since 1971, and was Chief, Section of Thoracic and Cardiovascular Surgery, from 1975 to 2002. Dr. Elkins earned his undergraduate and medical degrees at the University of Oklahoma and completed his surgical residency at the Johns Hopkins Hospital.

The Board of Directors has determined that Dr. Elkins should serve as a Director of CryoLife because of his education and experience in the medical field, particularly with respect to cardiovascular surgery.

J. Patrick Mackin assumed the position of President and Chief Executive Officer of CryoLife in September 2014, he was appointed to the CryoLife Board of Directors in October 2014, and he was appointed Chairman of the Board of Directors in April 2015. Mr. Mackin has more than 20 years of experience in the medical device industry. Prior to joining CryoLife, Mr. Mackin served as President of Cardiac Rhythm Disease Management, the largest operating division of Medtronic, Inc., from August 2007 to August 2014. At Medtronic, he previously held the positions of Vice President, Vascular, Western Europe and Vice President and General Manager, Endovascular Business Unit. Prior to joining Medtronic in 2002, Mr. Mackin worked for six years at Genzyme, Inc. serving as Senior Vice President and General Manager for the remaining two product liability claimsCardiovascular Surgery Business Unit and as Director of Sales, Surgical Products division. Before joining Genzyme, Mr. Mackin spent four years at Deknatel/Snowden-Pencer, Inc. in various roles and three years as a First Lieutenant in the U.S. Army. Mr. Mackin received an MBA from the Kellogg Graduate School of Management at Northwestern University and is a graduate of the U.S. Military Academy at West Point.

The Board of Directors has determined that Mr. Mackin should serve as Director of CryoLife because managementof his business acumen and substantial worldwide experience in the medical device industry. In addition, the Board of Directors believes that it is appropriate and useful to have the President and Chief Executive Officer of CryoLife serve as a member of the Board of Directors.

Ronald D. McCall, Esq. has concludedserved as a Director of CryoLife since January 1984. From 1985 to the present, Mr. McCall has been the owner of the law firm of Ronald D. McCall, P.A., based in Tampa, Florida. Mr. McCall was admitted to the practice of law in Florida in 1961. Mr. McCall received a B.A. and a J.D. from the University of Florida.

The Board of Directors has determined that eitherMr. McCall should serve as a lossDirector of CryoLife because of his legal training and experience. Also, the Board of Directors believes that his long-standing involvement with CryoLife provides him with a unique perspective on current issues facing CryoLife.

Harvey Morganhas served as a Director of CryoLife since May 2008. Mr. Morgan has more than 40 years of investment banking experience, with significant expertise in strategic advisory services, mergers and acquisitions, private placements, and underwritings. He served as a Managing Director of the investment banking firm Bentley Associates, L.P. from 2004 to 2012, and from 2001 to 2004 he was a Principal of Shattuck Hammond Partners, an independent investment banking and financial advisory firm. Mr. Morgan also serves on the Board of Directors of Family Dollar Stores, Inc. (NYSE: FDO) and previously served on the Board of Directors of Cybex International, Inc. (NASDAQ: CYBI). Mr. Morgan received his undergraduate degree from the University of North Carolina at Chapel Hill and an MBA from the Harvard Business School.

The Board of Directors has determined that Mr. Morgan should serve as a Director of CryoLife because of his past business experience, particularly with respect to investment banking and capital markets.

Jon W. Salvesonhas served as a Director of CryoLife since May 2012. Mr. Salveson is remotethe Vice Chairman, Investment Banking and Chairman of the Healthcare Investment Banking Group at Piper Jaffray Companies (NYSE: PJC). He joined Piper Jaffray in 1993 as an associate, was elected Managing Director in 1999, and was named the Group Head of Piper Jaffray’s international healthcare investment banking group in 2001. Mr. Salveson was appointed Global Head of Investment Banking and a member of the Executive Committee of Piper Jaffray in 2004, and has served in his present position as Vice Chairman, Investment Banking since July 2010. Mr. Salveson also serves on the Board of Directors of Sunshine Heart, Inc. (NASDAQ: SSH). Mr. Salveson received his undergraduate degree from St. Olaf College in 1987 and an M.M.M. in finance from the Kellogg Graduate School of Management at Northwestern University.

The Board of Directors has determined that Mr. Salveson should serve as a Director of CryoLife because of his considerable experience in investment banking in the healthcare industry. Mr. Salveson has advised CryoLife in particular with respect to numerous transactions.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires that CryoLife’s executive officers, Directors, and persons who beneficially own more than 10% of CryoLife’s stock file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, Directors, and greater than 10% beneficial owners are required by SEC regulations to furnish CryoLife with copies of all Section 16(a) forms they file.

Based solely on its review of copies of forms received by it pursuant to Section 16(a) of the Exchange Act or written representations from reporting persons, CryoLife believes that althoughwith respect to 2015, all Section 16(a) filing requirements applicable to its executive officers, Directors, and greater than 10% beneficial owners were complied with.

Code of Conduct

CryoLife has established a lossCode of Conduct that clarifies our standards of conduct in potentially sensitive situations; makes clear that CryoLife expects all employees, officers and Directors to understand and appreciate the ethical considerations of their decisions; and reaffirms our long-standing commitment to a culture of corporate and individual accountability and responsibility for the highest ethical and business practices.

In addition to the Code of Conduct, our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Controller, Assistant Controller and all other senior financial officers are also subject to our Code of Ethics for Senior Financial Officers. In the event that CryoLife amends or waives any of the provisions of the Code of Conduct or Code of Ethics for Senior Financial Officers applicable to its Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Controller or Assistant Controller, we intend to disclose that information on our website athttp://phx.corporate-ir.net/phoenix.zhtml?c=80253&p=irol-govConduct.

Policies and Procedures for Review, Approval, or Ratification of Transactions with Related Parties

The Board of Directors has adopted written policies and procedures for review, approval or ratification of transactions with related parties.

Types of Transactions Covered

It is reasonably possibleour policy to enter into or probable, a reasonable estimateratify related party transactions only when the Board of Directors, acting through the Audit Committee or as otherwise described herein, determines that lossthe related party transaction in question is in, or is not inconsistent with, the rangebest interests of losses cannot be made at this time. As of December 31, 2005CryoLife and its shareholders. We follow the Company had accrued a total of approximately $1.5 millionpolicies and procedures below for settled but unpaid claims and pending product liability claims and recorded $244,000 representing amountsany transaction in which we are, or are to be, recovered froma participant and the Company’s insurance carriers. The $1.5 million accrualannual amount involved exceeds $50,000 and in which any related party, as defined below, had, has, or will have a direct or indirect interest. Pursuant to the policy, compensatory arrangements with an executive officer or Director that are approved or ratified by the Compensation Committee or compensation received under our employee benefit plans that are available to all employees do not require additional Audit Committee approval.

We subject the following related parties to these policies: Directors (and nominees); executive officers; beneficial owners of more than 5% of our stock; any immediate family members of these persons; and any entity in which any of these persons is included asemployed, or is a component of accrued expenses and other current liabilities on the December 31, 2005 Consolidated Balance Sheet.

36


If the Company is unable to settle onegeneral partner or more of the product liability lawsuitsprincipal, or has a similar position, or in which the Companyperson has a 10% or greater beneficial ownership interest.

Standards Applied and Persons Responsible for Approving Related Party Transactions

The Corporate Secretary is responsible for maintaining a defendant,list of all related parties known to her and for submitting to the Audit Committee for its advance review and approval any related party transaction into which we propose to enter. If any related party transaction inadvertently occurs before the Audit Committee has approved it, the Corporate Secretary will submit the transaction to the Audit Committee for ratification as soon as she becomes aware of it. If the Audit Committee does not ratify the transaction, it will direct for the transaction to be either rescinded or modified as soon as is practicable. The Corporate Secretary may delegate her duties under the policy to another officer of CryoLife if any such lawsuit should be tried with a substantial verdict rendered in favorshe gives notice of the plaintiff(s), there can be no assurance that such verdict(s) would not exceeddelegation to the Company’s available liquid assets. Additionally,Audit Committee at its next regularly scheduled meeting.

When reviewing a related party transaction, the Company does not have a reasonable method for estimatingAudit Committee will examine all factors it deems relevant. If the amount of compensatory or punitive damages that could be assessed by a trial jury with respect to any lawsuitCorporate Secretary determines that it is unablenot practicable or desirable to settle priorwait until the next Audit Committee meeting, she will submit the related party transaction for approval or ratification to trial,a subcommittee of two persons of the Audit Committee, which possesses delegated authority to act between Audit Committee meetings. The Chair will report any action this subcommittee has taken under this delegated authority to the Audit Committee at its next regularly scheduled meeting.

The Audit Committee, or the subcommittee, will approve only those transactions that they have determined in good faith are in, or are not inconsistent with, the best interests of CryoLife and its shareholders.

Review of Ongoing Transactions

At the Audit Committee’s first meeting of each fiscal year, the Audit Committee reviews all related party transactions, other than those approved by the Compensation Committee as contemplated in the policy, that remain ongoing and have a remaining term of more than six months or remaining amounts payable to or receivable from CryoLife of more than $50,000 annually. Based on all relevant facts and circumstances, taking into consideration the factors discussed above, the Audit Committee will determine whether it is in, or not inconsistent with, the best interests of CryoLife and its shareholders to continue, modify, or terminate the related party transaction.

Standing Committees of the Board of Directors; Committee Assignments

During 2015, the Board of Directors had four standing committees: the Audit Committee, the Compensation Committee, the Corporate Governance Committee, and the Company’s product liability insurance policies do not include coverage for any punitive damages. Failure byRegulatory Affairs and Quality Assurance Committee. In 2015, the Company to resolveAudit Committee met seven times, the outstanding product liability claims within its ability to pay would have a material adverse effect onCompensation Committee meteleven times, the financial position, results of operations,Corporate Governance Committee meteleven times, the Regulatory Affairs and cash flows of the Company.

On April 1, 2006 the Company bound coverage for the 2006/2007 insurance policy year. This policy is a four-year claims-made insurance policy, i.e. claims incurred during the period April 1, 2003 through March 31, 2007 and reported during the period April 1, 2006 through March 31, 2007 are covered by this policy. Claims incurred prior to April 1, 2003 that have not been reported are uninsured.

The Company maintains claims-made insurance policies to mitigate its financial exposure to product liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. The Company periodically evaluates its exposure to unreported product liability claims and records accruals as necessary for the estimated cost of unreported claims related to services performed and products used. In January 2007 the Company retained an independent actuarial firm to perform revised estimates of the unreported claims as of December 31, 2006. The independent firm estimated the unreported product loss liability using a frequency-severity approach, whereby projected losses were calculated by multiplying the estimated number of claims by the estimated average cost per claim. The estimated claims were calculated based on the reported claim development methodQuality Assurance Committee metfive times, and the Bornhuetter-Ferguson method using a blend of the Company’s historical claim experience and industry data. The estimated cost per claim was calculated using a lognormal claims model blending the Company’s historical average cost per claim with industry claims data. The independent actuarial firm used a number of assumptions in order to estimate the unreported product loss liability including:

A ceiling of $5.0 million was selected for actuarial purposes in determining the liability per claim given the uncertainty in projecting claim losses in excess of $5.0 million,

The future claim reporting lag time would be a blend of the Company’s experiences and industry data,

The frequency of unreported claims for accident years 2001 through 2006 would be lower than the Company’s experience in the 2002/2003 policy year, but higher than the Company’s historical claim frequency prior to the 2002/2003 policy year,

The average cost per claim would be lower than the Company’s experience since the 2002/2003 policy year, but higher than the Company’s historical cost per claim prior to the 2002/2003 policy year,

The average cost per BioGlue claim would be consistent with the Company’s overall historical exposures until adequate historical data is available on this product line, and

The number of BioGlue claims per million dollars of BioGlue revenue would be 40% lower than non-BioGlue claims per million dollars of revenue. The 40% factor was selected based on BioGlue claims experience to-date and consultation with the actuary.

The Company believes that these assumptions provide a reasonable basis for the calculation of the unreported product liability loss, but accuracy of the actuarial firm’s estimates is limited by the general uncertainty that exists for any estimate of future activity due to uncertainties surrounding the assumptions used and due to Company specific conditions, including the Company’s increased litigation activity following the FDA Order, the Company’s low volume of pre-FDA Order historical claims,Compensation Committee and the scarcity of industry data directly relevant toCorporate Governance Committee met jointly one time. These committees are described below, and the Company’s business activities. Due to these factors, actual results may differ significantly from the assumptions used and amounts accrued.

Based on the actuarial valuation performed in January 2007 as of December 31, 2006, the Company estimated that its liability for unreported product liability claims was $6.6 million as of December 31, 2006. In accordance with Emerging Issues Task Force Issue 03-8, the Company has accrued $6.6 million, representing the Company’s best estimate of the total liability for unreported product liability claims related to services performed and products sold prior to December 31, 2006. The $6.6 million

37


balance is included as a component of accrued expenses and other current liabilities of $3.3 million and other long-term liabilities of $3.3 million on the December 31, 2006 Consolidated Balance Sheet. Further analysis indicated that the liability could be estimated to be as high as $12.3 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques. Based on the actuarial valuation, the Company estimated that as of December 31, 2006, $2.3 million of the accrual for unreported liability claims would be recoverable under the Company’s insurance policies. The $2.3 million insurance recoverable is included as a component of other receivables of $1.1 million and other long-term assets of $1.2 million on the December 31, 2006 Consolidated Balance Sheet. These amounts represent management’s estimate of the probable losses and anticipated recoveries for unreported product liability claims related to services performed and products sold prior to December 31, 2006. Actual results may differ from this estimate.

As of December 31, 2005 the Company accrued $7.5 million for unreported product liability claims and recorded a receivable of $2.5 million for unreported liability claims estimated to be recoverable under the Company’s insurance policies. This $7.5 million accrual is included as a component of accrued expenses and other current liabilities of $3.8 million and other long-term liabilities of $3.7 million on the December 31, 2005 Consolidated Balance Sheet. The $2.5 million insurance recoverable is included as a component of other current receivables of $1.1 million and other long-term assets of $1.4 million on the December 31, 2005 Consolidated Balance Sheet.

Insurance Coverage Dispute

In September 2006 the Company favorably settled insurance coverage disputes with former insurance carriers for $2.1 million, net of associated legal fees. The disputes involved losses stemming from approximately $11.3 million paid in 2005 by the Company in settlement of outstanding claims. No party admitted any liability as part of the September 2006 settlement. The net proceeds of $2.1 million were received in October 2006 and are included as a component of general, administrative, and marketing expenses on the Consolidated Statements of Operations for the year ended December 31, 2006.

SEC Investigation

On August 19, 2002 the Company issued a press release announcing that on August 17, 2002, the Company received a letter from the Atlanta District Office of the SEC inquiring about certain matters relating to the Company’s August 14, 2002 announcement of the FDA Order. The SEC notified the Company in July 2003 that the inquiry became a formal investigation in June 2003. CryoLife cooperated with this investigation both before and after the issuance of the formal order of investigation in June 2003 and intends to continue doing so. CryoLife voluntarily reported the names of six employees and former employees to the SEC in December 2002 after discovering they had apparently sold CryoLife shares on August 14, 2002, before trading was halted pending CryoLife’s press release reporting the FDA Order. These individuals were not and are not executive officers of CryoLife. The formal order of investigation indicates that the SEC’s scope includes whether, during 2002, among other things, CryoLife or others may have traded while in possession of material nonpublic information, made (or caused to be made) false or misleading statements or omissions in press releases and SEC filings, and failed to maintain accurate records and adequate controls. The investigation could also encompass matters not specifically identified in the formal order. On September 15, 2005 the SEC announced that it had commenced proceedings in federal district court against certain of the above-referenced former and current employees (and certain of their spouses) for alleged illegal insider trading arising out of their August 14, 2002 trading activities. Those proceedings resulted in settlements with the SEC. As of the date hereof, the SEC has had no discussions with CryoLife as to whether the SEC will seek relief against CryoLife, or the nature of any relief that may be sought. At present, CryoLife is unable to predict the ultimate focus, its current status, outcome of the investigation, or when it will be completed. An unfavorable outcome could have a material adverse effect on CryoLife’s reputation, business, financial position, results of operations, and cash flows.

Item 4.Submission of Matters to Vote of Security Holders.

Inapplicable.

Item 4A.Executive Officers of the Registrant.

The following table lists the executive officersmembers of CryoLife and their ages, positions with CryoLife, and the dates from which they have continually served as executive officers with CryoLife. Eacheach of the executive officersstanding committees as of CryoLife was elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next annual meeting of shareholders or until his earlier removal by the Board of Directors or his resignation.March 23, 2016:

 

38


NameDirector

Audit
Committee
Compensation
Committee
Corporate Governance
Committee
Regulatory Affairs
and Quality
Assurance Committee

J. Patrick Mackin,
Chairman, President, and Chief Executive Officer(1)

Thomas F. Ackerman

ü

James S. Benson

üChair

Daniel J. Bevevino

üü

Ronald C. Elkins, M.D.

Chairü

Ronald D. McCall,
Presiding Director

üChairü

Harvey Morgan

Chairü

Jon W. Salveson

ü

(1)Mr. Mackin was appointed Chairman of the Board of Directors in April 2015.

Audit Committee— CryoLife’s Audit Committee currently consists of three non-employee Directors: Mr. Morgan, Chair, Mr. Ackerman, and Mr. Bevevino, each of whom served on the Audit Committee for all of 2015. Each of the members of the Audit Committee meets the requirements of independence of Section 303A.02 of the current NYSE Listing Standards and also meets the criteria of Section 303A.06, as set forth in Rule 10A-3 promulgated under the Exchange Act, regarding listing standards related to audit committees. No member of the Audit Committee serves on the Audit Committee of more than three public companies. In addition, the Board of Directors has determined that all of the current members of the Audit Committee satisfy the definition of an “audit committee financial expert,” as promulgated in SEC regulations.

The Audit Committee operates under a written charter. The charter gives the Audit Committee the authority and responsibility for the appointment, retention, compensation, and oversight of CryoLife’s independent registered public accounting firm, including pre-approval of all audit and non-audit services to be performed by CryoLife’s independent registered public accounting firm. The Audit Committee also oversees and must review and approve all significant related party transactions. SeePolicies and Procedures for Review, Approval, or Ratification of Transactions with Related Parties of this Amendment No. 1 to Annual Report on Form 10-K.

The Audit Committee reviews the general scope of CryoLife’s annual audit and the nature of services to be performed for CryoLife in connection with it, acting as liaison between the Board of Directors and the independent registered public accounting firm. The Audit Committee also formulates and reviews various company policies, including those relating to accounting practices and internal control systems of CryoLife. In addition, the Audit Committee is responsible for reviewing and monitoring the performance of CryoLife’s independent registered public accounting firm, for engaging or discharging CryoLife’s independent registered public accounting firm, and for assisting the Board of Directors in its oversight of risk management and legal and regulatory requirements.

Compensation Committee— The Compensation Committee operates under a written charter that sets out the Compensation Committee’s functions and responsibilities. Our Compensation Committee currently consists of three non-employee Directors: Dr. Elkins, Chair, Mr. Bevevino, and Mr. McCall, each of whom served on the Compensation Committee for all of 2015. Each member of the Compensation Committee meets the independence requirements of Sections 303A.02(a)(i) and (ii) of the current NYSE Listing Standards, and is a non-employee director within the meaning of Rule 16b-3 under the Exchange Act and a disinterested director within the meaning of Section 162(m) of the Internal Revenue Code of 1986. Pursuant to the Compensation Committee Charter, the Compensation Committee is responsible for reviewing the performance of executive officers and setting the annual compensation for all senior officers, including the salary and the compensation package of executive officers. The Compensation Committee also manages the issuance of stock options, restricted stock awards, performance stock units, and other stock rights and cash incentives under CryoLife’s stock and incentive plans, recommends severance arrangements for the CEO and other senior officers, and, in conjunction with the Corporate Governance Committee, reviews and approves the corporate goals and objectives upon which the compensation of CryoLife’s CEO is based. See “Compensation Discussion and Analysis” later in this Amendment No. 1 to Annual Report on Form 10-K for information concerning the Compensation Committee’s role, processes and activities in overseeing executive compensation.

Pursuant to its charter, the Compensation Committee has the authority to delegate any of its decisions to a two-person subcommittee of the Compensation Committee, provided that a full report of any action taken is promptly made to the full Compensation Committee.

The Compensation Committee has the power to retain, determine the terms of engagement and compensation of, and terminate any consulting firm that may assist it in the evaluation of compensation decisions.

Corporate Governance Committee— CryoLife’s Corporate Governance Committee operates under a written charter that sets out the Corporate Governance Committee’s functions and responsibilities. The Corporate Governance Committee currently consists of three non-employee Directors: Mr. McCall, Chair, Mr. Benson, and Mr. Morgan, each of whom served on the Corporate Governance Committee for all of 2015. Each of these individuals meets the requirements of independence of Section 303A.02 of the current NYSE Listing Standards. The Corporate Governance Committee recommends potential candidates for the Board of Directors and oversees the annual self-evaluations of the Board of Directors and its committees. Each year, jointly with the Compensation Committee, the Corporate Governance Committee evaluates the performance of CryoLife’s CEO. The Corporate Governance Committee also recommends to the Board of Directors how the other committees of the Board of Directors should be structured and which Directors should be members of those committees. The Corporate Governance Committee also reviews and makes recommendations to the Board of Directors regarding the development of and compliance with our corporate governance guidelines.

Regulatory Affairs and Quality Assurance Committee— CryoLife’s Regulatory Affairs and Quality Assurance Committee currently consists of four non-employee Directors: Mr. Benson, Chair, Dr. Elkins, Mr. McCall, and Mr. Salveson, each of whom served on the Regulatory Affairs and Quality Assurance Committee for all of 2015. Each of these individuals meets the requirements of independence of Section 303A.02 of the current NYSE Listing Standards. The charter of the Regulatory Affairs and Quality Assurance Committee requires that a majority of its members be independent. Among other things, the Regulatory Affairs and Quality Assurance Committee assists us in its oversight of our regulatory affairs and quality assurance relating to its tissue processing, biologicals, and devices, both new and existing. The Regulatory Affairs and Quality Assurance Committee also meets quarterly with senior management in the Regulatory Affairs and Quality Assurance department, receives summaries of the semiannual reports from the Company’s external quality auditors and provides input into certain internal regulatory affairs and quality assurance policies. Finally, pursuant to its charter, the Regulatory Affairs and Quality Assurance Committee assists us in the oversight of compliance with other healthcare laws and regulations and, jointly with the Audit Committee, assists in the oversight with compliance with certain policies and procedures such as the Company’s Code of Business Conduct and its policy with respect to the Foreign Corrupt Practices Act.

Item 11.Executive Compensation.

Compensation Discussion and Analysis

This Compensation Discussion and Analysis (“CD&A”) describes the principles, objectives and features of our executive compensation program as applied to our chief executive officer and the other executive officers included in the Summary Compensation Table of this Amendment No. 1 to Annual Report on Form 10-K (collectively, our “named executive officers”). For 2015, our named executive officers were:

J. Patrick Mackin

    

Service as
President and Chief Executive
Officer;

Chairman of the Board of Directors effective April 9, 2015

Age
  

Position

Steven G. AndersonSince 198468President, Chief Executive Officer, and Chairman
David M. FronkSince 199843Vice President, Regulatory Affairs and Quality Assurance
Albert E. Heacox, Ph.D.Since 198956Senior Vice President, Research and Development
D. Ashley Lee CPASince 200042

    Executive Vice President, Chief Operating Officer and Chief Financial Officer
Gerald B. Seery
  Since 2005

Scott B. Capps

    50Vice President, Clinical Research

David C. Gale

Vice President, Research & Development

Jean F. Holloway

Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer

David P. Lang

    Senior Vice President, International Sales and& Marketing, until his separation from CryoLife effective September 8, 2015

EXECUTIVE SUMMARY

The Compensation Committee generally considers and approves executive compensation at its February meeting. These compensation decisions take into account a variety of information and analyses, including prior-year Company and individual executive performance, current-year performance expectations, any changes in roles and responsibilities and competitive market data provided by the Compensation Committee’s independent consultant and by management.

Steven G. Anderson2015 Say on Pay Vote and Program Decisions

At CryoLife’s annual meeting of shareholders on May 20, 2015, over 98% of the shareholder votes cast were in favor of our named executive officers’ 2015 compensation. This advisory vote indicated strong support for the executive compensation program. The 2014 advisory vote approved the executive compensation program by over 95% of the stockholders’ votes cast at CryoLife’s 2014 annual meeting.

The Compensation Committee considered these 2015 advisory vote results as it evaluated its compensation policies and made compensation decisions subsequent to last year’s annual meeting. Based in part on this consideration, together with the individual executives’ and the Company’s actual and expected performance, as well as competitive market data provided by the Compensation Committee’s independent compensation consultant and by management, and after also considering recommendations from its consultant and management, the Compensation Committee did not make significant changes to its executive compensation policies during 2015. The following is a summary of the Compensation Committee’s significant 2015 executive compensation decisions.

Officers received 2015 base salary increases of either 0% or 3%, based on considerations such as personal performance, company performance, and market positioning.

The total value of officers’ long-term incentive award levels and the types of equity vehicles (stock options, restricted stock, and performance stock units) remained approximately the same as for 2014, but for 2015, that value was allocated equally among the equity vehicles based on estimated grant date fair value (whereas in 2014, officers were awarded an equal number of options, shares, and performance stock units).

The performance stock unit awards’ design was changed from being based solely on performance against an adjusted EBITDA metric to being based 80% on target adjusted EBITDA, 10% on target adjusted inventory levels, and 10% on target accounts receivable – days sales outstanding.

The Compensation Committee determined the compensation to be provided to:

Mr. Lang, in conjunction with his separation from CryoLife as Senior Vice President, International Sales & Marketing, and

Ms. Holloway, in conjunction with her hiring by CryoLife as Vice President, General Counsel and Corporate Secretary.

Pay-for-Performance Alignment

The Compensation Committee believes it has developed a foundercompensation program that ensures that the interests of our executives are aligned with those of shareholders by rewarding corporate and individual performance at levels necessary to attain established business and individual performance goals. The key pay-for-performance aspects of the executive compensation program, are described below:

50% or more of each named executive officer’s target total direct compensation is in the form of variable pay opportunities tied to individual and/or company performance and/or to shareholder value creation;

Targets for short-term incentive opportunities are set at challenging levels designed to encourage business growth;

Short-term incentive opportunities are tied significantly to revenue and adjusted net income performance, as defined below, both of which emphasize factors over which management is expected to have control and which are intended to incentivize management to achieve company performance that will further our strategic business plan and ultimately deliver value to our shareholders;

Long-term incentive opportunities are equity-based and include stock options, which only provide value to executives if the stock price increases beyond the grant date price, and performance stock units, which are earned if specified results for adjusted EBITDA, target adjusted inventory levels, and target accounts receivable – days sales outstanding, as defined below, are attained; and

Named executive officers are subject to minimum stock ownership requirements to ensure a strong alignment between executives and shareholders and to encourage a long-term view of performance.

As described in this Amendment No. 1 to Annual Report on Form 10-K, in 2015, the executive compensation program effectively delivered pay-for-performance, as follows:

Our 2015 revenue and adjusted net income results were 95.0% and 119.0%, respectively, of target performance, which resulted in annual bonus payouts of 60.1% and 140.0%, respectively, of target award levels under those components of the bonus program, and

Our 2015 adjusted EBITDA was 112.3% of target performance, our adjusted inventory levels were 89.0% of target (where our goal is to come in under target), and our accounts receivable – days sales outstanding were 108.2% of target performance (where our goal is to come in under target), which resulted in shares earned under our performance stock units of 129.3% of the target award level.

Throughout this Amendment No. 1 to Annual Report on Form 10-K, we refer to adjusted net income, adjusted EBITDA, adjusted inventory, and accounts receivable – days sales outstanding. These are non-GAAP financial measures that reflect adjustments to similar measures reported under U.S. GAAP. The section “Non-GAAP Financial Measurement Information” to this Amendment No. 1 to Annual Report on Form 10-K provides certain required information regarding these non-GAAP measures, a reconciliation to our audited U.S. GAAP financial statement measures for 2015, as presented in our Original Filing.

ROLES AND RESPONSIBILTIES

Compensation Committee

The Compensation Committee determines and approves the compensation of CryoLife’s officers, including the named executive officers. The Compensation Committee is supported by the CEO, executive management and an independent compensation consultant, who attends Compensation Committee meetings when invited and provides input and information as requested by the Compensation Committee. The Compensation Committee regularly meets in executive session without the CEO or any members of management present. Except as otherwise noted, all 2015 compensation decisions were recommended by management and the independent compensation consultant and approved by the Compensation Committee. Our CEO does not make recommendations to the Compensation Committee or participate in Compensation Committee meetings regarding his own compensation.

Independent Compensation Consultant

The Compensation Committee has the authority to engage independent compensation consultants to assist with its responsibilities. With respect to general executive compensation decisions made during fiscal 2015 the Compensation Committee appointed Towers Watson & Co. (“Towers Watson”) as its independent consultant for general executive compensation matters. The compensation consultant reports directly to the Compensation Committee, is directed by the Compensation Committee, and provides no other services to CryoLife. The consultant generally performs an annual review of executive and non-employee Director compensation, analyzes the relationship between executive pay and company performance, benchmarks executive and Director compensation against such compensation provided by appropriate comparator companies and industry standards, informs the Compensation Committee of emerging practices and trends, assists with special projects at the request of the Compensation Committee, and attends Compensation Committee meetings when invited. Except as otherwise noted, all Compensation Committee actions during 2015 were taken upon the recommendation of CryoLife senior management and following consultation with Towers Watson.

COMPENSATION PHILOSOPHY AND OBJECTIVES

The Compensation Committee’s compensation philosophy is to provide competitive salaries and link the executive officers’ incentive compensation to the achievement of annual and long-term performance goals related to both personal and company performance without encouraging excessive or inappropriate risk taking. Each primary component of compensation is intended to accomplish a specific objective, as summarized in the following chart:

Compensation Component

Primary Purpose

Form

Performance Linkage

Base SalaryProvide sufficiently competitive pay to attract and retain experienced and successful executivesCashSalary adjustments are based partially on individual executive performance and partially on other factors such as competitive market positioning and internal pay equity; in addition, company performance may impact the decision of whether or not any salary adjustments should be made
Short-Term IncentiveEncourage and reward individual contributions and aggregate company results with respect to meeting and exceeding short-term financial and operating goals, and incentivize executives to meet or exceed individual performance standardsCashShort-term incentive payouts are 100% performance-based, with 40% tied to revenue, 40% tied to adjusted net income, and 20% tied to individual executive performance
Long-Term IncentiveEncourage and reward long-term shareholder value creation, create and sustain a retention incentive, and facilitate long-term stock ownership among our executive team to further align executive and shareholder interests

Performance Stock Units

Stock Options

Restricted Stock

Performance stock units are not earned unless specific levels of company performance are achieved during the relevant performance period; stock options deliverrealizable value to executives only if the stock price increases beyond the grant date stock price; therealizable value of restricted stock and performance stock unit awards is linked to CryoLife’s stock price after the grant date

COMPENSATION MIX

The Compensation Committee approves the primary components of the executive compensation program and generally intends for it to provide more variable pay opportunities than fixed pay opportunities and to provide more long-term incentive opportunities than short-term incentive opportunities. These objectives result in a pay program that aligns pay and performance. The following chart summarizes the target pay mix for the named executive officers for fiscal 2015:

Compensation Component

  Mackin   Lee   Capps   Gale   Holloway  Lang 

Salary($)

   600,000     376,000     291,500     254,400     302,000(1)   276,000(2) 

Short-Term Incentive (Target)($)

   360,000     225,600     116,600     101,760     120,800(1)   110,400(2) 

Long-Term Incentive (Grant Date Fair Value)(3)($)

   1,017,873     407,154     244,274     244,274     244,274(4)   244,274  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Target Total Direct Compensation($)

   1,977,873     1,008,754     652,374     600,434     667,074(4)   630,674  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

% Fixed(5)

   30.3     37.3     44.7     42.4     45.3    43.8  

% Variable(6)

   69.7     62.7     55.3     57.6     54.7    56.2  

% Short-Term Compensation(7)

   48.5     59.6     62.6     59.3     63.3    61.3  

% Long-Term Compensation(8)

   51.5     40.4     37.4     40.7     36.6    38.7  

(1)Full-year salary, short-term incentive, and long-term incentive amounts shown for purposes of comparison. Actual salary and target short-term incentive amounts were pro-rated for the period of Ms. Holloway’s employment during 2015 ($226,500 and $91,039 respectively). Ms. Holloway received a new-hire bonus, as well as a stock option grant and a performance-based restricted stock award upon her commencement of employment in April 2015. These awards have not been included above as they are one-time inducement grants. These grants are more fully discussed atGrants of Plan-Based Awards – Employment Agreement with Jean F. Holloway.
(2)Full-year salary and short-term incentive amounts shown for purposes of comparison. Actual salary and target short-term incentive amounts were pro-rated for the period of Mr. Lang’s employment during 2015 ($190,369 and $75,673 respectively).
(3)Long-term Incentive (Grant Date Fair Value) is based on a grant date closing share price of $11.00 for both restricted stock and performance stock units, except for Ms. Holloway’s restricted stock and performance stock units, which were based on a grant date closing share price of $9.64. For the purpose of demonstrating the compensation mix, the grant used for Ms. Holloway was the same as her peers.
(4)Ms. Holloway received a different number of shares at a different time than other officers based on her mid-year start date. These numbers represent what she would have received had she been an employee throughout 2015.
(5)Salary as a percentage of Target Total Direct Compensation.
(6)Short-Term Incentive plus Long-Term Incentive as a percentage of Target Total Direct Compensation.
(7)Salary plus Short-Term Incentive as a percentage of Target Total Direct Compensation.
(8)Long-Term Incentive as a percentage of Target Total Direct Compensation.

COMPENSATION BENCHMARKING

As part of its decision-making process, the Compensation Committee requests and reviews relevant and credible benchmark data regarding executive compensation levels, company performance, and the relative relationship between

executive pay and company performance. However, the Compensation Committee views this data as one of many inputs in its decision-making process, which also includes other assessments of our performance, assessments of each executive’s performance, significant changes in roles and responsibilities, internal pay equity among executives and retention considerations.

Each year, the Compensation Committee reviews and considers an executive compensation study prepared by its independent compensation consultant, additional compensation survey data provided by management, and internal equity information. The executive compensation study is generally completed in the fourth quarter of the year and is used to inform the Compensation Committee’s decisions regarding the subsequent year’s compensation. Accordingly, the relevant study and market information reviewed by the Compensation Committee with regard to 2015 executive compensation was prepared in October 2014 and presented to the Compensation Committee in the fourth quarter of 2014. We refer to this study, as updated in January 2015, as the “2014 Study.” As in prior years, the 2014 Study assessed both the competitiveness of pay levels and the alignment of pay with company performance.

Our 2015 compensation peer group, which is more particularly described below, had median revenues, based on the latest figures available at the time the 2014 Study was prepared, of $137 million and median market capitalization as of August 31, 2014, of $500 million. In addition to using officer pay information as disclosed by companies in the compensation peer group, the 2014 Study used survey data drawn from four compensation surveys of U.S. companies, including biotech and healthcare companies, with targeted revenues of $150 million, in order to approximate our 2015 annual revenue. With respect to all named executive officers included in the 2014 Study, the data in the study was an even blend of the 2015 peer group and the survey information. In each case, Towers Watson trended the compensation data forward to January 1, 2015 by a factor of 3.0%. We refer to the blended 2015 peer group and survey compensation data for all named executive officers as the “2015 Peer Group Information.”

The following peer companies were used for the 2014 Study:

Peer Company

FYE
Revenue(1) ($)

Merit Medical Systems, Inc.

449

Angiodynamics, Inc.

351

Exactech, Inc.

237

Alphatec Holdings, Inc.

203

RTI Surgical, Inc.

198

Abiomed, Inc.

184

The Spectranetics Corp.

157

Cardiovascular Systems, Inc.

137

Endologix, Inc.

132

Atrion Corp.

132

Vascular Solutions, Inc.

109

AtriCure, Inc.

81

Anika Therapeutics, Inc.

75

LeMaitre Vascular, Inc.

64

Rockwell Medical, Inc.

52

Median

137

CryoLife Estimated Revenues

140

CryoLife’s 2015 annual revenue was positioned near the median of the peer group’s annual revenue, and the peer group included an equal number of companies that were larger and smaller than CryoLife based on annual revenues.

The Compensation Committee believed that the pay practices of these companies provided a useful reference point for pay and performance comparisons at CryoLife.

(1)Latest FYE revenue, in millions, at the time the peer group was developed.

The following survey sources were used in the 2014 Study:

Towers Watson CDB General Industry Executive Compensation Database

Towers Watson CSR Top Management Compensation Survey

Mercer General Industry Executive Compensation Study

Radford Global Life Sciences Survey

Both the peer companies and survey sources were recommended by Towers Watson, the Compensation Committee’s independent compensation consultant and approved by the Compensation Committee. In approving the peer group, the Compensation Committee considered the fact that each company is (or was at the time) publicly-traded, operates in a similar industry, was similar in size, scope and complexity and is representative of our pool for executive talent. The Compensation Committee also concluded that each one was within a reasonable range of CryoLife’s historical, current and projected revenues. Nonetheless, the Compensation Committee reviews and considers changes to the peer group and survey sources in connection with each year’s study. This is done to ensure that the peer group and survey sources continue to reflect the most appropriate reference points for CryoLife.

2015 COMPENSATION COMPONENTS

The primary components of CryoLife’s executive compensation program are base salary, short-term incentives and long-term incentives. CryoLife also provides executives with tax-deferred savings opportunities, participation in company-wide benefits programs and limited perquisites.

2015 Base Salary

The Compensation Committee generally reviews base salary levels each February as part of its overall review and approval of the executive compensation program. Based on its review in late 2014 and early 2015, the Compensation Committee deemed it appropriate to increase some executive officers’ base salaries by 3% above 2014 levels.

Comparison of 2015 and 2014 Base Salaries

Executive

  2015
($)
  2014
($)
  Increase
(%)
 

Mackin

   600,000    600,000    —    

Lee

   376,000    376,000    —    

Capps

   291,500    283,000    3  

Gale

   254,400    247,000    3  

Holloway

   302,000(1)   —  (2)   —  (2) 

Lang

   276,000(3)   268,000    3  

(1)Full-year salary shown for purposes of comparison. Actual salary was pro-rated for the period of Ms. Holloway’s employment during 2015 ($226,500).
(2)Ms. Holloway was hired April 1, 2015; accordingly, there is no 2014 salary or percent increase data for her.
(3)Full-year salary shown for purposes of comparison. Actual salary was pro-rated for the period of Mr. Lang’s employment during 2015 ($190,369), as proscribed inPotential Payments upon Termination or Change of Control – Employment, Separation and Release, and Change of Control Agreements – Separation and Release Agreement with David P. Lang.

Analysis

The 2014 Study of peer group base salaries found our executive salaries to be within a competitive range of 90-110% of the median of their peer group. Based on input from management and in consultation with Towers Watson, the Compensation Committee approved merit increases for 2015 for only certain offices, basing such approvals on cost of living and individual performance considerations, as well as recognition that our 2014 business performance did not meet plan in a number of respects.

2015 Short-Term Incentives

The Compensation Committee approved the 2015 short-term incentive program (the “2015 Annual Plan”) in February 2015. The 2015 Annual Plan provides for the same performance measures (adjusted for projected changes in 2015 levels of revenue and adjusted net income), same design, and same target incentive opportunity as the 2014 program.

In March 2015, the Compensation Committee approved a plan that we refer to as our “Umbrella Plan” for the primary purpose of ensuring tax deductible treatment for us for awards made to certain key executives, including each of our named executive officers, under the 2015 Annual Plan. The 2015 Annual Plan operates within the Umbrella Plan so that cash bonuses to our named executive officers and other participants in our Umbrella Plan may qualify as “performance-based compensation” and therefore be tax deductible under Section 162(m) of the Internal Revenue Code (“Section 162(m)”).

The Umbrella Plan establishes a threshold performance requirement that we must meet in order for the participants to earn a bonus under the 2015 Annual Plan. For fiscal 2015, we must achieve adjusted net income of at least $8,554,000 in order for awards to be made under the Umbrella Plan. If the threshold performance requirement is met, each participant may be eligible under the plan to receive up to 140% of his or her target bonus under the 2015 Annual Plan. After the end of the fiscal year, though, the Compensation Committee may exercise its discretion to adjust any amounts earned under the Umbrella Plan downward to the amounts earned under the 2015 Annual Plan, so that the entire amount paid to each of our named executive officers under the 2015 Annual Plan can be treated as performance-based compensation and, therefore, tax deductible under Section 162(m).

2015 Performance Goals

Performance Measure

  Weight
(%)
   Threshold
($)
   Target
($)
   Maximum
($)
 

Revenue

   40     145,885,000     153,563,000     161,241,000  

Adjusted Net Income

   40     14,542,000     17,108,000     19,674,000  

Individual Goals

   20     |————Performance Rating ————|  

See the section “Non-GAAP Financial Measure Information” to this Amendment No. 1 to Annual Report on Form 10-K for further details regarding the adjusted net income performance measure and the reconciliation of that measure to net income as reported for purposes of U.S. GAAP.

Analysis

Upon review and consideration, the Compensation Committee believed that the performance measures of revenue and adjusted net income used in the 2015 short-term incentive program will motivate management to achieve increases in 2015 revenues, net income, and operating cash flow goals, as well as to drive personal performance and provide appropriate incentives to satisfy employee retention goalsAs a result, the Compensation Committee approved the revenue and adjusted net income measures (as adjusted for 2015 forecast results) that it used with respect to 2014 for use in the 2015 Annual Plan.

The Compensation Committee believed that 2015 revenue and adjusted net income threshold and target performance levels were challenging, but expected them to be achieved. The 2015 revenue and adjusted net income targets are within the range of 2015 product and service revenue guidance previously publicly announced by CryoLife.

For 2015, the performance measures and weights for the short-term incentive program remained the same as in 2014, with a 100% payout for performance at target levels and the following additional primary features:

Revenues:

Under Threshold – less than 95% of target performance (0% payout)

Threshold - 95% of target performance (60% payout)

Maximum - 105% of target performance (140% payout)

Over Maximum – more than 105% of target performance (140% payout)

Adjusted net income:

Under Threshold – less than 85% of target performance (0% payout)

Threshold - 85% of target performance (60% payout)

Maximum - 115% of target performance (140% payout)

Over Maximum – more than 115% of target performance (140% payout)

Individual performance component that comprises 20% of the total award opportunity; earned based on performance rating

The performance ranges are narrow, relative to the payout ranges, in order to focus executives on achieving business performance goals in a manner consistent with business plans and communicated guidance.

Analysis – Program Design

In arriving at its decision to approve the 2015 short-term incentive program design, measures and goals, the Compensation Committee took into consideration the following factors and analyses:

A general satisfaction with the core plan design and its pay-for-performance orientation,

A belief that revenue and adjusted net income are key to incentivizing management to achieve company performance that will further our strategic business plan and ultimately deliver value to shareholders, without encouraging excessive risk taking,

The plan’s similarity to the short-term incentive plan designs of peer companies,

CryoLife’s 2014 performance, and whether any performance improvements were required to achieve the 2015 goals, and

Recent historical payout levels that the Compensation Committee believed indicated that performance goals over the last few years had been set at reasonably challenging, but attainable levels.

The Compensation Committee sets short-term incentive opportunities, in conjunction with a review of base salaries, as part of executives’ overall “target total cash compensation.” The Compensation Committee decided to carry forward for 2015 the design of the 2014 short-term incentive program, as it believed that the performance measures of revenue and adjusted net income used in the 2014 program would continue to motivate management to achieve increases in those metrics. The Compensation Committee also believed that these goals would drive the personal performance of the named executive officers and provide appropriate incentives to satisfy employee retention goals.

With respect to adjusted net income, the Committee chose to exclude certain items over which it believed that either management has servedinsufficient control or could distort the underlying operating performance of the Company.

The Compensation Committee discussed management’s recommended 2015 performance targets and payout opportunities with its independent compensation consultant and with management and determined that the recommended program design, targets, and payout opportunities were consistent with its desire to ensure that no short-term incentives would be paid unless challenging performance was achieved and then only at levels commensurate with such performance. The Compensation Committee believed that the 2015 short-term incentive program target percentages provided each executive with an appropriate incentive potential given his position with and importance to CryoLife, and that they were appropriately sized based on the 2015 Peer Group Information and the internal pay equity information reviewed by the Compensation Committee.

Analysis – Plan Payout

The 2015 short-term incentive payouts in early 2016 were based on actual financial performance results of CryoLife relative to the pre-determined goals and on the individual performance results of each executive officer with respect to the individual performance component. Individual performance bonuses for each named executive officer other than that for the CEO were based on reviews conducted by the CEO of individual performance relative to individual goals. Mr. Mackin’s 2015 individual performance bonus reflected a joint review of his 2015 performance by the Compensation Committee and the Corporate Governance Committee. The committees determined that Mr. Mackin’s individual performance met or exceeded the committees’ expectations.

The following tables show the performance results for 2015 and the actual amount of short-term incentive paid to each named executive officer:

2015 Annual Incentive Program

Actual vs. Target Performance

Performance Measure

  Weight
(%)
   Actual
Performance
($)
  Target
Performance
($)
  Performance
% of Target
(%)
 Payout
% of Target
(%)

Revenue

   40    145,898,000  153,563,000  95.0 60.1

Adjusted Net Income

   40    20,366,000  17,108,000  115.0(1) 140.0

Individual Goals

   20    Executive-
specific
  Executive-
specific
  0 to 100 0 to 100

(1)Performance percentage of Target was 119%, but 115% is the maximum payout.

2015 Annual Incentive Program

Actual(1) vs. Target Payout

Executive

  Actual
Payout
($)
  Target
Payout
($)
   Payout
% of Target
(%)
 

Mackin

   360,099    360,000     100  

Lee

   225,662    225,600     100  

Capps

   104,972    116,600     90  

Gale

   101,788    101,760     100  

Holloway

   91,039(2)   91,014     100  

Lang

   75,637(2)   75,616     100  

(1)All of the currently employed named executive officers received personal performance bonuses based on their individual performance for 2015. Mr. Lang’s personal performance bonus was paid in accordance with the terms of his separation and release agreements. For more information, seePotential Payments upon Termination or Change of Control – Employment, Separation and Release, and Change of Control Agreements – Separation and Release Agreement with David P. Lang.
(2)Ms. Holloway’s and Mr. Lang’s actual and target payout amounts reflect a pro-rated portion of their respective annual incentive opportunities based on their periods of employment during 2015.

These tables demonstrate how the short-term incentive program design effectively aligned performance and compensation, as our below-target performance with respect to the revenue and above-target performance with respect to adjusted net income yielded payouts at 60.1% and 140%, respectively.

2015 Long-Term Incentives

Based on input from management and in consultation with Towers Watson, the Compensation Committee considered the long-term incentive program and determined to change the design of the 2015 program to have the mix of equity awards be based on an equal allocation of value, rather than a fixed number of options/stock/units, among stock options, restricted stock, and performance stock units, with approximately one-third of the value being granted allocated to each type of award. The Compensation Committee allocates and values performance stock units at their target numbers.

The Compensation Committee determined that the estimated grant date fair value of the awards to officers in 2015 should remain approximately the same as was granted in 2014. In order to determine the number of options, shares of restricted stock, and target performance shares to be used to deliver such grant date fair value, the Compensation Committee directed management to determine the numbers of shares of restricted stock and target performance stock units using the closing share price of our stock as of market close on February 18, 2015, and to also determine the number of stock options using the estimated fair value of the options as of the same date. The numbers of options, shares, and target performance stock units, determined using the February 18, 2015 share price and option value, were granted on February 19, 2015. See the section “Plan-Based Awards” to this Amendment No. 1 to Annual Report on Form 10-K for a description of the terms of the performance stock units. For 2015, the performance stock units are subject to three performance measures: adjusted EBITDA, target adjusted inventory levels, and target accounts receivable – days sales outstanding (“DSO”), as further described under “Analysis,” below. See the section “Non-GAAP Financial Measurement

Information” to this Amendment No. 1 to Annual Report on Form 10-K for further details regarding the adjusted EBITDA, adjusted inventory, and accounts receivable – DSO performance measures and the reconciliation of those measures to the appropriate figures as reported under U.S. GAAP.

The following table provides the 2015 equity awards to the named executive officers, as approved by the Compensation Committee:

   2015 Annual Equity Grant Level 

Executive

  Perf. Stock
Units(1)
(#)
   Stock
Options(2)
(#)
   Restricted
Stock(3)
(#)
   Total
(#)
 

Mackin

   30,832     85,105     30,832     146,769  

Lee

   12,333     34,042     12,333     58,708  

Capps

   7,399     20,425     7,399     35,223  

Gale

   7,399     20,425     7,399     35,223  

Holloway(4)

   7,252     20,307     7,252     34,811  

Lang(5)

   7,399     20,425     7,399     35,223  

(1)Reflects the target performance stock unit award level. The actual number of shares earned under the performance stock units was based on adjusted EBITDA, target adjusted inventory levels, and target accounts receivable – days sales outstanding (80%, 10%, and 10% weightings, respectively). Actual earned shares vest(ed) 50% on the first anniversary of the award date, 25% on the second anniversary, and 25% on the third anniversary, except for Ms. Holloway as her 2015 performance stock units were granted after her start date and the vesting schedule was abbreviated to correspond to the vest dates of the 2015 performance stock units awarded to other named executive officers
(2)Stock options vest 1/3 per year beginning on the first anniversary of the grant date.
(3)Restricted stock cliff vests on the third anniversary of the grant date.
(4)Note that Ms. Holloway joined the Company in April 2015. Therefore, her 2015 Annual Equity Grant Level reflects her prorated period of employment.
(5)Note that Mr. Lang separated from the Company mid-year, so while this chart accurately reflects awards he was granted, it does not intend to reflect equity that vested.

Analysis

In approving the 2015 equity award levels, the Compensation Committee considered the following primary factors:

The Compensation Committee’s intention to grant in 2015 approximately the same long-term incentive value as in 2014

The desire to have an even mix of value among stock options, restricted stock, and performance stock units

The objective of achieving performance and retention incentives through the use of annual equity grants, especially given CryoLife’s stock price volatility

The availability of shares under CryoLife’s shareholder-approved equity plans

Our share price and its effect on the value of equity awards if grants were to continue to be made based on a number of shares, as opposed to a target value

The Compensation Committee determined vesting schedules in consultation with Towers Watson and believes that such vesting provides the appropriate long-term incentive for executives’ continued employment. The Compensation Committee believes that adjusted EBITDA is generally a reasonable proxy for CryoLife’s performance, but allows for adjustments to eliminate items that might provide improper incentives or items over which management has little or no control. This led the Compensation Committee to develop the 80/10/10 split among adjusted EBITDA adjusted inventory levels accounts receivable – days sales outstanding (“DSO”). The Compensation Committee believes that the adjusted EBITDA, adjusted inventory, and accounts receivable – DSO threshold and target performance levels are challenging, but expects them to be achieved. The 2015 adjusted EBITDA calculation methodology is consistent with the methodology used in 2014, and based on management’s expectations, the target performance level is consistent with the range of 2015 earnings per share guidance previously publicly announced by CryoLife. See the section “Non-GAAP

Financial Measurement Information” to this Amendment No. 1 to Annual Report on Form 10-K for further details regarding the adjusted EBITDA, adjusted inventory, and accounts receivable – DSO performance measures and the reconciliation of those measures to the relevant U.S. GAAP measures.

Analysis – PSUs Earned

In arriving at its decision in February 2016 to certify our adjusted EBITDA, adjusted inventory, and accounts receivable – DSO performance with respect to the 2015 performance stock units, the Compensation Committee took into consideration our actual performance results relative to the pre-determined performance goals. The following table presents the target, threshold, and maximum adjusted EBITDA, adjusted inventory and accounts receivable - DSO performance levels associated with target, threshold, and maximum award opportunities under the 2015 performance stock unit grants. The table also provides the actual performance level for 2015, as certified by the Compensation Committee, together with the associated levels of shares that were earned.

2015 Performance Stock Units

Actual vs. Target/Threshold/Maximum Performance

Performance Measure

  Target
Performance
   Threshold
Performance
   Maximum
Performance
   Actual
Performance
   Performance
% of Target
(%)
  Payout
(% of Target)
 

Adjusted EBITDA

  $23,349,000    $19,850,000    $26,851,000    $26,229,000     112.3    136.7  

Adjusted Inventory

  $15,500,000    $17,900,000    <$15,000,000    $13,800,000     89.0    120  

Accounts Receivable - DSO

   50 days     58 days     <48 days     54.08 days     108.2  80  

Each portion of the performance stock unit is earned ratably, in tiers based on tiered satisfaction of the performance metric, as set forth in the table below. The Compensation Committee adopted this tiered/ratable approach to address the variability and volatility inherent in some of the adjusted EBITDA inputs, and expanded it to include the additional two metrics.

EBITDA
(80% of shares)
 Inventory
(10% of shares)
 Accounts Receivable – DSO
(10% of shares)
Performance Tier
(% of Target)
 Payout
(% of Target)
 (Inv. in $m)
Performance Tier
 Payout
(% of Target)
 (AR-DSO)
Performance Tier
 Payout
(% of Target)
< 85.0 0 >$17.9m 0 >58.0 0
85.0 - 89.9 60 $17.0m-17.9m 60 55.1-58.0 60
90.0 – 94.9 80 $16m-16.9m 80 52.1-55.0 80
95.0 – 106.9 100 $15m-15.9m 100 48.0-52.0 100
107.0 – 115 110-150(1) <$15.0m 120 < 48.0 120
>115.0 150    

(1)For EBITDA Performance Tier 106.9 < 115, the Payout Percent of Target is determined by this formula: actual adjusted EBITDA divided by target adjusted EBITDA ($23,349,000); minus 1.069; times 5; plus 1.10; times the target number of shares up to a maximum of 150% Target Payout.

Pursuant to the terms of the performance stock unit grants, 50% of the shares earned vested on February 19, 2016, 25% of the shares will vest on February 19, 2017, and the remaining 25% of the shares will vest on February 19, 2018, assuming the executive continues to be employed by us on those dates. See the section “Non-GAAP Financial Measurement Information” to this Amendment No. 1 to Annual Report on Form 10-K for further details regarding the adjusted EBITDA performance measure and the reconciliation of that measure to net income as reported for purposes of U.S. GAAP.

Target Total Direct Compensation

The Compensation Committee believed that the blend of stock options, restricted stock, and performance stock units appropriately balanced the performance, shareholder alignment, and retention objectives of CryoLife’s long-term incentive program. The use of multiple award types is a prevalent practice among industry peers, and the use of performance stock units creates even stronger alignment between pay and performance. In addition, the annual grant frequency results in more consistent performance and retention strength by reflecting changes in the stock price year over year.

The Compensation Committee used a value-based approach to determine the size of 2015 equity grants, as it felt this approach enabled them to provide compensation that more accurately matched their intended value. The Compensation Committee determined vesting schedules for the 2015 equity awards in consultation with Towers Watson and believes that they provided the appropriate long-term incentive for continued employment with us.

In determining the individual components of the officers 2015 compensation (i.e., salary, target short-term incentive, and long-term incentive), the Compensation Committee evaluated the resulting target total direct compensation against market benchmarks, as follows below, taking into account the Compensation Committee’s desire to have target total direct compensation generally within a competitive range of our peer group median. The following table summarizes the named executive officers’ 2015 target total direct compensation; the positioning of that compensation relative to the peer group median; and the primary rationale for approving each named executive officer’s compensation at the level shown:

2015 Target Total Direct Compensation

Compared to Peer Median

Executive

  2015 Target
Total Direct
Compensation
Opportunity(1)
($)
  Peer
Median(2)

($)
  CRY vs.
Median
(%)
    

Mackin

   1,977,873    1,850,000    107    

Within a competitive range of the 50thpercentile(3)

Lee

   1,008,754    910,000    111    

Near a competitive range of the 50thpercentile

Capps

   652,374    625,000    104    

Within a competitive range of the 50thpercentile(3)

Gale

   600,434    445,000    135    

Above the 75th percentile

Holloway

   667,074(4)   615,000(5)   108    

Within a competitive range of the 50thpercentile(3)

Lang

   630,674    555,000    114    

Near a competitive range of the 50thpercentile(3)

(1)Equity grant value based on a grant date closing stock price of $11.00 for restricted stock and performance stock units, except for Ms. Holloway’s restricted stock and performance stock units which were based on a grant date closing share price of $9.64, and a grant date Black-Scholes Option Value of $3.45. Performance stock units are included at target award levels/values.
(2)Based on data provided by Towers Watson (the 2014 Study).
(3)Competitive range for total direct compensation recommended by Towers Watson and agreed to by the Compensation Committee as 80-120% of the peer group 50th percentile.
(4)Note that Ms. Holloway joined the Company in April 2015. Therefore, her 2015 Target Total Direct Compensation opportunity reflects her prorated period of employment.
(5)Ms. Holloway was not employed by CryoLife at the time of the 2014 Study. It was conducted for the vacant General Counsel position.

Equity and Cash Incentive Plan

In May 2015, the shareholders approved certain amendments to the Second Amended and Restated 2009 Stock Incentive Plan (the “Stock Incentive Plan”), to be renamed the CryoLife, Inc. Equity and Cash Incentive Plan (the “Equity and Cash Plan”), based on management’s recommendation and in consultation with Towers Watson. The Equity and Cash Plan includes new provisions for cash-based incentive payments that are intended to comply with the requirements to be “qualified performance-based compensation,” and ensure the tax deductibility of such payments to certain named executive officers, under Section 162(m) of the Internal Revenue Code.

2015 Deferred Compensation

The CryoLife, Inc. Executive Deferred Compensation Plan allows certain key employees of CryoLife, including the named executive officers, to defer receipt of some or all of their salaries, commissions, and/or the cash portion of any bonus awarded pursuant to the short-term executive incentive plan. The plan’s administrative committee, subject to ratification and approval of the Compensation Committee, establishes the maximum and minimum percentages of bonus awards that plan participants may defer in each plan year. These percentages were from zero to 75% for base salary, commissions, and the annual cash bonus for 2015. Plan participants may establish their respective deferral amounts for their base salaries and commissions prior to the beginning of each calendar year, and prior to July for their short-term incentive compensation for that year, which is calculated and paid after the completion of the plan year.

The plan provides for tax-deferred growth of deferred compensation and, pursuant to the terms of the plan, CryoLife agrees to distribute to participants the deferred amounts, credited/debited with hypothetical gains and/or losses linked to the performance of investment options selected by participants from among the non-proprietary investment options available under the plan. The plan does not have investment options that provide for above-market or preferential earnings. Distribution of all deferred compensation, including any gains or losses, occurs upon death, disability, retirement or termination. Plan participants may elect to receive the distribution in a lump sum or in annual installments of up to 15 years, or via a combination thereof upon death, disability or retirement. Also, a plan participant may elect to receive distributions while still employed by CryoLife if at least two years have elapsed from the plan year in which the deferred amounts would have otherwise been paid to the plan participant if not for the deferral. Distributions made while the plan participant is still employed by CryoLife and distributions made pursuant to termination will be paid in a lump sum to the plan participant. Hardship withdrawals during any plan year may be made upon the occurrence of an unforeseeable emergency for a particular plan participant or if a plan participant receives a hardship distribution under CryoLife’s 401(k) plan. All deferred amounts and deemed earnings thereon are fully vested at all times. CryoLife has no current plans to match any contributions of any executive officer.

2015 Perquisites

It is CryoLife’s policy not to provide perquisites to its officers without prior approval of the Compensation Committee.To the extent that perquisites are incidental to a business-related expense, such as personal use of a business club, the named executive officers are generally required to reimburse CryoLife for any incremental cost of such personal benefit. Other than these incidental personal benefits, none of our NEOs receive any perquisites that are not also provided on a non-discriminatory basis to all full-time employees, except for Mr. Mackin, whose compensation is discussed atEmployment; Separation and Release, and Change of Control Agreements below, and except for supplemental disability insurance and airline club memberships provided to certain of the named executive officers. In keeping with CryoLife’s practice with respect to all full-time employees, executive officers are also eligible to receive certain one-time benefits upon achieving employment milestones, including receiving $5,000 towards a vacation and two weeks of additional vacation upon reaching 15 years of service with CryoLife, $10,000 towards a vacation and two weeks of additional vacation upon reaching 20 years of service with CryoLife, and two weeks of additional vacation upon reaching 25 years of service with CryoLife.

EMPLOYMENT, SEPARATION AND RELEASE, AND CHANGE OF CONTROL AGREEMENTS

Employment Agreement with J. Patrick Mackin

CryoLife and Mr. Mackin entered into an employment agreement (the “Mackin Agreement”) dated July 7, 2014 that became effective September 2, 2014. The Mackin Agreement addresses Mr. Mackin’s role and responsibilities as our President and Chief Executive Officer, and Chairmanhis rights to compensation and benefits during active employment and termination benefits. See “Plan Based Awards—Employment Agreement with J. Patrick Mackin” to this Amendment No. 1 to Annual Report on Form 10-K for details regarding terms of the Mackin Agreement.

Employment Agreement with Jean F. Holloway

In February 2015 the Board appointed Ms. Jean F. Holloway as Vice President and General Counsel, and CryoLife and Ms. Holloway entered into an employment agreement (the “Holloway Agreement”), that became effective on April 1, 2015.

The Holloway Agreement addresses Ms. Holloway’s role and responsibilities, her rights to compensation and benefits during active employment, the treatment of various termination scenarios (see “Potential Payments Upon Termination or Change of Control – Employment, Separation and Release, and Change of Control Agreements – Employment Agreement with Jean F. Holloway”), and various post-employment prohibitions regarding competing with us, soliciting our employees and customers, and disclosing our confidential information. In connection with her commencement of employment, the Holloway Agreement provides that Ms. Holloway will be eligible for a target bonus of 40% of base salary, pro-rated for 2015, and a lump sum signing bonus of $50,000. In addition, the Holloway Agreement provided for a stock option grant of 7,000 shares of company common stock, vesting over three years, and an award of 7,000 shares of company restricted shares, which will cliff vest three years following the grant date.

The Compensation Committee believes Ms. Holloway’s compensation, including her base salary and incentive compensation, was necessary and appropriate to attract a candidate with her experience and qualifications. The Compensation Committee authorized a signing bonus it believes facilitated her acceptance of CryoLife’s employment offer.

Separation and Release Agreement with David P. Lang

David P. Lang, our former Senior Vice President, International Sales & Marketing, separated from employment with us effective September 8, 2015, and he and CryoLife entered into a Separation and Release Agreement (the “Lang Agreement”) that became effective on October 13, 2015.

The Lang Agreement provides that Mr. Lang has received or will receive payments that are described at “Potential Payments Upon Termination or Change of Control – Employment, Separation and Release, and Change of Control Agreements – Separation and Release Agreement with David P. Lang”.

Analysis

The Compensation Committee believes that it is appropriate to provide separation benefits under certain circumstances. Separation benefits are often appropriate for executive-level employees, in particular, as it may take them a significant period of time to identify and transition to another executive-level role outside CryoLife. Continuation of salary and health and other benefits, as well as outplacement benefits, all assist with these transitions. In addition, a meaningful level of separation benefits is often required to obtain a release of claims and often valuable continued cooperation, non-compete, non-solicitation, and non-disparagement covenants from the departing employee. The Compensation Committee determined that for these reasons, and in recognition of Mr. Lang’s service to us, the separation benefits noted above were appropriate.

Change of Control Agreements with Other Named Executive Officers

CryoLife has entered into change of control agreements with each of the named executive officers other than Mr. Mackin (whose change of control arrangements are set forth in his employment agreement). The material terms of those agreements are described in “Potential Payments upon Termination or Change of Control – Change of Control Agreements with Other Named Executive Officers.”As described in “Separation and Release Agreement with David P. Lang”above, Mr. Lang’s change of control agreement was terminated by the Lang Agreement.

Analysis

It is the Compensation Committee’s intent that provisions in the change of control agreements regarding an executive’s termination in conjunction with a change of control, preserve executive morale and productivity and encourage retention in the face of the disruptive impact of an actual or rumored change of control of CryoLife. In addition, these provisions align executive and shareholder interests by allowing executives to consider corporate transactions that are in the best interests of CryoLife’s shareholders and other constituents without undue concern over whether the transactions may jeopardize the executives’ own compensation. The Compensation Committee does not believe that the change of control agreements provide undue incentive for the executive officers to encourage a change of control. Finally, the provisions protect shareholder interests in the event of a change of control by helping increase the likelihood of management continuity through the time of the change of control, which could improve company performance and help maintain and enhance shareholder value.

The change of control agreements are “double-trigger” agreements, as they require both a change of control and termination of employment to have occurred before CryoLife is required to make payments pursuant to the agreements. The Compensation Committee approved a larger termination payment under the agreement for Mr. Lee than for the other executive officers based upon his senior officer status and his relatively greater ability to influence decisions regarding whether or not a change of control transaction should be pursued.

ADDITIONAL POLICIES AND PRACTICES

Clawback Policy

The 2007 Executive Incentive Plan includes a clawback provision. This clawback allows CryoLife to recover bonus awards under the plan that were paid in the 12-month period prior to a significant financial statement restatement. The amounts may be recovered at the discretion of the Compensation Committee and subject to applicable laws if the award was made on the basis of CryoLife having met or exceeded specific performance targets for performance periods affected by the restatement. In such an event, the Compensation Committee may require participants to repay to CryoLife the difference between the bonus actually received by the participant and the amount of the recalculated bonus, using the restated financial results. Furthermore, Mr. Mackin’s employment agreement contains an additional requirement that he repay any portion of severance payments he has previously received from us if he fails to comply with certain post-employment protective covenants.

To the extent not addressed by the provisions above, the Compensation Committee continues to consider the appropriate structure for additional clawback provisions. These additional clawback provisions would, in specified instances, require executive officers to return to CryoLife incentive compensation paid if such compensation is based upon financial results that turn out to have been materially inaccurate when published. The Compensation Committee intends to adopt and disclose such a policy in compliance with and to the extent required by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010.

Stock Ownership Guidelines

CryoLife maintains stock ownership guidelines for executives that have been recommended and approved by the Compensation Committee along with the Corporate Governance Committee, and approved by the Board of Directors. The current stock ownership guidelines were adopted in November 2015 and require the following stock ownership requirements for the named executive officers:

a.Section 16 Officers: Each section 16 officer of the Corporation shall continuously hold a value of the Corporation’s common stock equal to the value of a multiple of that officer’s then current base pay at CryoLife. The multiples applicable to such officers are as follows:

i.Chief Executive Officer & President: Four (4) times;

ii.Executive Vice Presidents and Senior Vice Presidents: Two (2) times; and

iii.All other Section 16 officers: One (1) time.

b.Retention requirements: Each Section 16 Officer who has not yet acquired ownership of the required value of common stock set forth above must retain at least 50% of the net number of shares acquired upon the exercise of any employee stock option or the vesting of any performance shares, restricted stock or restricted stock units (the net number of shares acquired shall be the number of shares remaining after shares are tendered, sold or netted to pay any applicable exercise price and withholding taxes).

c.Waivers: The Chairs of the Compensation Committee and the Corporate Governance Committee shall have the authority to grant waivers from these stock ownership requirements in compelling circumstances such as undue hardship.

d.Qualifying shares: For purposes of satisfying these stock ownership requirements, the following shall be included: shares owned directly or indirectly through a stock purchase plan sponsored by CryoLife, by the person’s spouse, in a revocable trust of which the person or the person’s spouse is the trustee, any other shares related to or underlying vested or unvested restricted stock, or restricted stock units and vested performance share units (at actual, earned levels and only if and to the extent that any applicable performance criteria have been satisfied). It shall not include shares held through any other form of indirect beneficial ownership or shares underlying unexercised options or unvested performance share units.

These guidelines became effective for all currently employed named executive officers on November 17, 2015. As of March 21, 2016, all of the currently employed named executive officers were in compliance with the ownership levels set forth in the guidelines or, in the case of Mr. Mackin and Ms. Holloway, were on track to meet the new guidelines.

Anti-Hedging Policy

CryoLife executive officers are prohibited from trading in publicly traded options, puts, calls, straddles, or similar derivative securities of CryoLife at any time, whether or not issued directly by CryoLife or by any exchange, and may not engage in put or call transactions involving CryoLife’s stock or purchase financial instruments designed to hedge or offset any decrease in the market value of CryoLife securities except for standard collars or prepaid forward transactions that have been pre-approved at least 90 days in advance by the independent Directors of the Board of Directors since its inception. Mr. Anderson has more than 35 yearsor a committee consisting solely of experience in the implantable medical device industry. Priorindependent Directors and that are disclosed to founding CryoLife, Mr. Anderson was Senior Executive Vice President and Vice President, Marketing, from 1976 until 1983 of Intermedics, Inc. (now Guidant Corp.),shareholders on a manufacturer and distributor of pacemakers andForm 4 or by other medical devices. Mr. Anderson is a graduate of the University of Minnesota.

David M. Fronk was appointedmeans acceptable to the positionSEC. Furthermore, executive officers are prohibited from effecting short sales of Vice President of Regulatory Affairs and Quality Assurance in April 2005 and has been with the Company since 1992, serving as Vice President of Clinical Research from December 1998 to April 2005 and Director of Clinical Research from December 1997 until December 1998. Mr. Fronk is responsible for developing and implementing improved safety processes and procedures for new and existing medical products. Prior to joining the Company, Mr. Fronk held engineering positions with Zimmer Inc. from 1986 until 1988 and Baxter Healthcare Corporation from 1988 until 1991. Mr. Fronk served as a market manager with Baxter Healthcare Corporation from 1991 until 1992. Mr. Fronk received his B.S. in Mechanical Engineering from the Ohio State University in 1985 and his M.S. in Biomedical Engineering from the Ohio State University in 1986.our securities at any time.

Albert E. Heacox, Ph.D.,Equity Grants/Inside Information was appointed to the position of Senior Vice President of Research and Development in December 2004. Dr. Heacox has been with the Company since June 1985 and served as Vice President of Laboratory Operations from June 1989 to December 2004. Dr. Heacox was promoted to Senior Vice President in December of 2000. Dr. Heacox has been responsible for developing protocols and procedures for both cardiovascular and connective tissues, implementing upgrades in procedures in conjunction with the Company’s quality assurance programs, and overseeing all processing and production activities of the Company’s laboratories. Dr. Heacox is now responsible for the continued development of the Company’s current products as well as the evaluation of new technologies. Prior to joining the Company, Dr. Heacox worked as a researcher with the U.S. Department of Agriculture and North Dakota State University, developing methods for the preservation of cells and animal germ plasma storage. Dr. Heacox received a B.A. and an M.S. in Biology from Adelphi University, received his Ph.D. in Biology from Washington State University and completed his post-doctorate training in cell biology at the University of Cologne, West Germany.

D. Ashley Lee, CPA, has served as Executive Vice President, Chief Operating Officer, and Chief Financial Officer since November 2004. Mr. Lee has been with the Company since December 1994 serving as Vice President of Finance, Chief Financial Officer, and Treasurer from December 2002 to November 2004; as Vice President Finance and Chief Financial Officer from April 2000 to December 2002; and as Controller of the Company from December 1994 until April 2000. Mr. Lee is responsible for the financial affairs of the Company, as well as investor and corporate communications, legal affairs, manufacturing operations, information technology, human resources, and risk management. From 1993 to 1994, Mr. Lee served as the Assistant Director of Finance for Compass Retail Inc, a wholly-owned subsidiary of Equitable Real Estate. From 1987 to 1993, Mr. Lee was employed as a certified public accountant with Ernst & Young, LLP. Mr. Lee received his B.S. in Accounting from the University of Mississippi.

Gerald B. Seery has served as Senior Vice President of Sales and Marketing since October 2005. Mr. Seery has been with the Company since July 1993 serving as Vice President of International Operations from July 2005 to October 2005, President of CryoLife Europa from April 2002 to July 2005, President of AuraZyme from March 2001 to April 2002, and Vice President of Marketing from August 1995 to March 2001. Mr. Seery is responsible for developing and implementing the Company’s sales and marketing plans and supervising all tissue procurement activities. Prior to joining the Company, Mr. Seery held senior marketing management positions with Meadox Medicals from 1982 until 1985, Electro Catheter Corporation from 1985 until 1989 and Daig Corporation from 1992 until 1993, accumulating fifteen years of specialized

39


marketing experience in cardiovascular medical devices. Mr. Seery received his BA in International Economics at The Catholic University of America in Washington, D.C. in 1978 and completed his MBA at Columbia University in New York in 1980.

40


PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Market Price of Common Stock

The Company’s Common StockCompensation Committee generally adheres to a policy of not granting equity-based compensation awards at times when insiders are in possession of material, non-public information. One notable exception to this policy is traded on the New York Stock Exchange under the symbol “CRY.” The following table sets forth, for the periods indicated, the intra-day high and low sale prices per share of Common Stock on the NYSE.

2006

  High  Low

First quarter

  $5.65  $2.95

Second quarter

   5.50   4.25

Third quarter

   6.90   5.07

Fourth quarter

   7.80   5.70

2005

  High  Low

First quarter

  $8.60  $5.86

Second quarter

   8.28   5.70

Third quarter

   8.05   6.41

Fourth quarter

   7.20   3.10

As of February 16, 2007 the Company had 503 shareholders of record.

The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain any future earnings for funding its capital requirements and, therefore, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The holders of any outstanding shares of 6% convertible preferred stock issued by the Company have a preference as to the payment of dividends over the holders of shares of common stock. The holders of other shares of preferred stock that the Company may choose to issue could also have a preference as to the payment of dividends over the holders of common stock. See discussions of the Company’s debt and limitations on the payment of dividends in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and Item 8, “Note 6 of the Notes to Consolidated Financial Statements”.

The following table provides information about purchases by the Company during the quarter ended December 31, 2006 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

Issuer Purchases of Equity Securities

Common Stock

Period

  Total Number of
Common Shares
Purchased
  Average Price
Paid per
Common Share
  

Total Number
of Common Shares
Purchased as

Part of Publicly
Announced
Programs

  Maximum Number
of Common Shares
That May Yet Be
Purchased Under
the Programs

10/01/06 – 10/31/06

  —    $—    —    —  

11/01/06 – 11/30/06

  1,518   6.30  —    —  

12/01/06 – 12/31/06

  —     —    —    —  
             

Total

  1,518  $6.30  —    —  

The Company currently has no stock repurchase program, publicly announced or otherwise. The common shares shown were tendered to the Company in payment of the exercise price of outstanding options.

41


6% Convertible Preferred Stock

The Company did not repurchase any shares of its 6% convertible preferred stock in the quarter ended December 31, 2006.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2006 with respect to sharesequity

grants to new hires, which can be made as of the hire date, provided that management discloses to the Compensation Committee at the time of grant any material, non-public information. In all other instances, if the Compensation Committee approves the grant of an option or equity award at a time when it is in possession of material, non-public information, it is the Compensation Committee’s general policy to delay the grant and pricing of the option and/or issuance of the equity award until a date after the public dissemination of all such material, non-public information.

TAX IMPACT OF COMPENSATION DECISIONS

Section 162(m)

Section 162(m) of the Internal Revenue Code generally limits to $1 million the amount of compensation, other than certain “performance-based” compensation, that CryoLife common stock that may be issued under existing equitydeduct for federal income tax purposes in any given year with respect to the compensation plans. CryoLife’s Board of Directors ineach of the past has awarded grants of options tochief executive officer and the three most highly-compensated executive officers employed by the CryoLife at the end of the year (other than the chief financial officer). While the Compensation Committee considers the deductibility of awards as one factor in determining executive compensation, as noted above, the Compensation Committee also looks at other factors in making its decisions and employees on a case-by-case basis when sufficient shares wereretains the flexibility to grant awards it determines to be consistent with our goal for its executive compensation program even if the award is not available under equitydeductible by us for tax purposes.

Section 409A

Since Section 409A of the Internal Revenue Code, which deals with deferred compensation plans approved by shareholders.arrangements, was enacted, the Compensation Committee’s policy has been to structure all executive compensation arrangements to comply, to the extent feasible, with the provisions of Section 409A so that the executives do not have to pay additional tax and CryoLife does not intendincur additional withholding obligations. The Compensation Committee intends to continue this practice exceptand has amended all of the named executive officers’ currently outstanding employment agreements and/or change of control agreements in order to bring them into compliance with Section 409A.

REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee reviewed and discussed this CD&A with management. In reliance on this review and discussion, the Compensation Committee recommended to the extentBoard of Directors that shares are otherwise unavailable under shareholder-approved plans and the grants are permitted by applicable NYSE rules.

   Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants, and Rights
  Weighted Average
Exercise Price of
Outstanding Options,
Warrants, and Rights
  Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
   (a)  (b)  (c)

Plans approved by shareholders

  2,129,570  $6.98  1,901,336

Plans not approved by shareholders

  58,925  $18.62  —  
          

Total

  2,188,495  $7.29  1,901,336
          

Item 6.Selected Financial Data.

The following Selected Financial Data shouldthis CD&A be readincluded in conjunction with the Company’s consolidated financial statements and notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in thisCryoLife’s Amendment No. 1 to Annual Report or incorporated herein by reference.

Selected Financial Data

(in thousands, except percentages and per share data)

   December 31, 
   2006  2005  2004  2003  2002 

Operations

      

Revenues

  $81,311  $69,282  $62,384  $59,532  $77,795 

Net income (loss)

   365   (19,535)  (18,749)  (32,294)  (27,761)

Net loss applicable to common shareholders

   (608)  (20,312)  (18,749)  (32,294)  (27,761)

Research and development as a percentage of revenues

   4.4%  5.4%  6.3%  6.1%  5.9%

Loss Per Common Share

      

Basic

  $(0.02) $(0.85) $(0.81) $(1.64) $(1.43)

Diluted

  $(0.02) $(0.85) $(0.81) $(1.64) $(1.43)

Year-End Financial Position

      

Total assets

  $79,865  $76,809  $73,261  $75,027  $106,414 

Working capital

   26,472   23,922   19,689   14,790   39,385 

Long term liabilities

   4,864   4,909   5,629   5,716   4,552 

Convertible preferred stock

   3   3   —     —     —   

Shareholders’ equity

   52,088   50,621   49,660   48,338   79,800 

Current ratio1

   2:1   2:1   2:1   2:1   3:1 

Shareholders’ equity per diluted common share

  $2.10  $2.11  $2.16  $2.46  $4.11 

1

Current assets divided by current liabilities.

42


Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

For CryoLife Inc., (“CryoLife” or the “Company”), the year ended December 31, 2006 brought a return to profitability as CryoLife reported net incomeon Form 10-K for the year ended December 31, 2006. 2015, and CryoLife’s 2016 proxy statement on Schedule 14A, for filing with the SEC.1

Compensation Committee

RONALD C. ELKINS, M.D., CHAIR

DANIEL J. BEVEVINO

RONALD D. MCCALL

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers currently serve, or served during fiscal 2015, as a member of the Compensation Committee of any other company that has or had an executive officer serving as a member of our Board of Directors. None of our executive officers currently serve, or served during fiscal 2015, as a member of the board of directors of any other company that has or had an executive officer serving as a member of our Compensation Committee.

1The material in this report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any filing of CryoLife under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

Executive Compensation

SUMMARY COMPENSATION TABLE

The fourth quarterfollowing table sets forth information with respect to each of 2006the named executive officers — Mr. Mackin who served as Chief Executive Officer; Mr. Lee, our Chief Financial Officer, Messrs. Capps and Gale and Ms. Holloway, who were the three most highly compensated of the other executive officers of CryoLife employed at the end of fiscal 2015; and Mr. Lang, who would have been one of the three most highly compensated officers had he continued to be employed by us at the end of fiscal 2015.

Name and Principal

Position

  Year   Salary
($)
   Bonus(1)
($)
   Stock
Awards(2)

($)
   Option
Awards(3)

($)
   Non-Equity
Incentive Plan
Compensation(4)
($)
   All Other
Compensation(5)

($)
   Total
($)
 
(a)  (b)   (c)   (d)   (e)   (f)   (g)   (h)   (i) 

J. Patrick Mackin,

   2015     600,000     72,000     678,304     339,569     288,099     74,034     2,052,006  

Chairman, President and Chief Executive Officer(6)

   2014     197,727     223,868     2,545,000     1,668,000     64,874     62,733     4,762,202  

D. Ashley Lee

   2015     376,000     45,120     271,326     135,828     180,542     19,862     1,028,678  

Executive Vice President, Chief Operating Officer, and Chief Financial Officer

   2014     376,000     45,120     332,340     67,997     122,634     18,497     962,588  
   2013     365,000     43,800     200,337     42,332     147,714     18,224     817,407  

Scott B. Capps

   2015     291,500     11,660     162,778     81,496     93,312     5,257     646,003  

Vice President, Clinical Research

   2014     283,000     22,640     199,400     40,800     61,534     5,113     612,487  
   2013     270,000     21,600     120,200     25,400     72,845     5,021     515,066  

David C. Gale,

                

Vice President, Research & Development(7)

   2015     254,400     20,352     162,778     81,496     81,436     4,654     605,116  

Jean F. Holloway,

                

Vice President, General Counsel, Corporate Secretary, and Chief Compliance Officer(8)

   2015     226,500     68,203     211,779     95,679     72,836     25,618     700,615  

David P. Lang,

                

Senior Vice President, International Sales & Marketing(9)

   2015     190,369     15,123     162,778     81,496     60,514     328,472     838,752  

(1)Amounts represent the personal performance component of the annual award paid pursuant to the (1) 2015 Equity and Cash Incentive Plan, which was paid 100% in cash in February 2016, (2) 2014 short-term incentive program under the 2007 Executive Incentive Plan, which was paid 100% in cash in February 2015; and (3) 2013 short-term incentive program under the 2007 Executive Incentive Plan, which we paid 100% in cash in February 2014. Amounts also include additional signing bonuses or discretionary bonus paid during the applicable year. The 2015 amounts for Ms. Holloway include a signing bonus of $50,000, which was paid in April 2015 upon her commencement of employment with the Company.

(2)Amount reflects the aggregate grant date fair value of restricted stock and performance stock unit awards as calculated in accordance with FASB ASC Topic 718. See Notes 1 and 16 of the Notes to Consolidated Financial Statements filed with CryoLife’s Annual Report on Form 10-K for the year ended December 31, 2015 for assumptions we used in valuing these awards.
(3)Amount reflects the aggregate grant date fair value of stock option awards as calculated in accordance with FASB ASC Topic 718. See Notes 1 and 16 of the Notes to Consolidated Financial Statements filed with CryoLife’s Annual Report on Form 10-K for the year ended December 31, 2015 for assumptions we used in valuing the stock option awards.
(4)The 2015 amounts represent the revenue and adjusted net income performance components of the awards earned pursuant to the 2015 Equity and Cash Incentive Plan.
(5)The amounts for fiscal 2015 include matching contributions under the Company’s 401(k) plan and disability insurance premiums for all named executive officers. Fiscal 2015 amounts also include (i) for Mr. Mackin, reimbursement of club dues, an $18,000 auto allowance and $44,370 in Company paid relocation expenses; (ii) for Ms. Holloway, reimbursement of club dues and $18,280 for Company paid relocation expenses; and (iii) for Mr. Lang, amounts payable under the Lang Agreement, including $276,000 in base salary severance, payable in a lump-sum on January 31, 2017, continued Company medical coverage of $13,847, outplacement services of $15,000 and payment of unused vacation of $12,739.
(6)Mr. Mackin was not a named executive officer of the Company for fiscal year 2013.
(7)Mr. Gale was not a named executive officer of the Company for fiscal year 2013 or 2014.
(8)Ms. Holloway joined the Company as an executive officer April 1, 2015, therefore, she was not a named executive officer of the Company for fiscal year 2013 or 2014.
(9)Mr. Lang terminated employment with the Company on September 8, 2015. He was not a named executive officer of the Company for fiscal year 2013 or 2014.

GRANTS OF PLAN-BASED AWARDS

Name

  Grant
Date
   Estimated Possible Payouts Under
Non-Equity Incentive Plan
Awards(1)
   Estimated Possible Payouts Under
Equity Incentive Plan Awards(2)
   All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (3)

(#)
   All Other
Option
Awards:
Number of
Securities
Underlying
Options

(#)
   Exercise
or Base
Price of
Option
Awards

($/Sh)
   Closing
Market
Price on
Committee
Action
Date

($/Sh)
   Grant
Date Fair
Value of
Stock and
Option
Awards

($)
 
    Threshold
($)
   Target
($)
   Maximum
($)
   Threshold
(#)
   Target
(#)
   Maximum
(#)
           
(a)  (b)   (c)   (d)   (e)   (f)   (g)   (h)   (i)   (j)   (k)   (l)   (m) 

J.Patrick Mackin

   2/19/15     244,800     360,000     475,200                  
   2/19/15                 30,832           339,152  
   2/19/15                   85,105     11.00     11.00     339,569  
   2/19/15           18,499     30,832     44,398             339,152  

D.Ashley Lee

   2/19/15     153,408     225,600     297,792                  
   2/19/15                 12,333           135,663  
   2/19/15                   34,042     11.00     11.00     135,828  
   2/19/15           7,400     12,333     17,760             135,663  

Scott B. Capps

   2/19/15     79,288     116,600     153,912                  
   2/19/15                 7,399           81,389  
   2/19/15                   20,425     11.00     11.00     81,496  
   2/19/15           4,439     7,399     10,655             81,389  

Gale

   2/19/15     69,197     101,760     134,323                  
   2/19/15                 7,399           81,389  
   2/19/15                   20,425     11.00     11.00     81,496  
   2/19/15           4,439     7,399     10,655             81,389  

Holloway

   9/10/15     61,889     91,014     120,138                  
   9/10/15                 7,252           69,909  
   4/1/15                 7,000           71,960  
   9/10/15                   20,307     9.64     9.64     70,059  
   4/1/15                   7,000     10.28     10.28     25,620  
   9/10/15           4,351     7,252     10,443             69,909  

Lang

   2/19/15     51,419     75,616     99,814                  
   2/19/15                 7,399           81,389  
   2/19/15                   20,425     11.00     11.00     81,496  
   2/19/15           4,439     7,399     10,655             81,389  

(1)These columns represent the awards granted under our 2015 short-term incentive program under the 2007 Executive Incentive Plan.
(2)These columns represent awards of performance stock units pursuant to our Equity and Cash Plan. In regard to the restricted shares of common stock earned pursuant to this grant, 50% vested on the first anniversary of grant date, 25% will vest on the second anniversary of the grant, and 25% will vest on the third anniversary, except for Ms. Holloway as her 2015 performance stock units were granted after her start date and the vesting schedule was abbreviated to correspond to the vest dates of the 2015 performance stock units awarded to other NEOs.
(3)This column represents awards of stock options pursuant to our Equity and Cash Plan. One-third of the shares became exercisable in the first anniversary of grant, and an additional one-third will become exercisable on each subsequent anniversary thereof until all shares of the option are exercisable on the third anniversary, assuming continuous employment. The exercise price of $11.00 per share is equal to theclosing price of our common stock on the NYSE on the date of issuance, February 19, 2015, except for Ms. Holloway’s award which was based on the September 10, 2015 grant date closing share price of $9.64. The value of the options is based on an option value of $3.99, except for Ms. Holloway’s award which was based on an option value of $3.45. These options have a seven-year term.

Employment Agreement with J. Patrick Mackin

In July 2014 the Board of Directors appointed Mr. Mackin as President and CEO, and CryoLife and Mr. Mackin entered into an employment agreement (the “Mackin Agreement”). The Mackin Agreement has an initial term of three (3) years following the effective date, extended by one day for each day beginning on the second anniversary of the effective date. The Mackin Agreement provides that commencing January 1, 2015, Mr. Mackin is entitled to participate in annual long-term incentive opportunities as determined by the Compensation Committee consistent with those provided to similarly situated CryoLife executive officers and in accordance with CryoLife’s plans and applicable award agreements. Benefits currently include participation in CryoLife’s plan-based awards with other CryoLife executives for performance stock units, stock options, and restricted stock subject to continued employment and achievement of corporate/Board of Directors objectives set by the Committee.

The Mackin Agreement provides for a strong quartertarget cash bonus of 60% of base salary, a $200,000 signing bonus and new hire grants of options to purchase 400,000 shares of Company common stock and a performance share grant with respect to 250,000 shares of Company common stock. In the event Mr. Mackin’s employment is terminated without cause or Mr. Mackin resigns for good reason, he is entitled to a cash severance payment of 1.5 times his base salary and annual cash bonus for the year of termination (or the prior year bonus if termination is prior to the date bonuses are awarded) paid in regular payroll installments over eighteen (18) months plus continued Company as product and preservation services revenuesmedical coverage for the quarter reachedsame period. If Mr. Mackin’s employment is terminated without cause, Mr. Mackin resigns, or for good reason during the period beginning six (6) months prior to and ending two (2) years following a four-year highchange of control of the Company, Mr. Mackin is entitled to receive a termination payment, in lieu of the severance described in the prior sentence, of 2.5 times his base salary and BioGlue quarterly revenues reached an all time highannual cash bonus for the Company. year of termination (or the prior year bonus if termination is prior to the date bonuses are awarded), paid in a lump sum. The agreement also includes various post-employment prohibitions regarding competing with us, soliciting our employees and customers, and disclosing our confidential information.

For purposes of the year ended December 31, 2006 revenues increased for eachMackin Agreement, “cause” generally means (i) an intentional act of CryoLife’s three tissue types, cardiovascular, vascular,fraud, embezzlement, theft, or any other material violation of law that occurs during or in the course of the executive’s employment, (ii) intention damage of Company assets, (iii) intentional disclosure of Company confidential information contrary to the Company’s policies, (iv) material breach of the executive’s obligations under the agreement, (v) intentional engagement by the executive in any activity that would constitute a breach of his duty of loyalty or of his assigned duties, (vi) intentional breach by the executive of any Company policies or procedures, (vii) willful and orthopaedic and also for BioGlue, resulting in an increase in product and preservation services revenues of 17% over 2005.

The year ended December 31, 2006 also broughtcontinued failure by the resolution of some legal matters still outstandingexecutive to perform his assigned duties, other than as a result of incapacity due to physical or mental illness, (viii) executive is prevented from performing certain duties contemplated by the FDA Orderagreement by reason of an agreement with a prior employer, or (ix) willful conduct by the executive that is demonstrably and materially injurious to the Company, monetarily or otherwise.

For purposes of the Mackin Agreement, “good reason” generally means (i) the assignment to the executive, without his consent, of any duties materially inconsistent with his position, authority, duties, or responsibilities, including changes in status, offices, or titles and any change in the executive’s reporting requirements that would cause him to report to an officer who is junior in seniority to the officer to whom he previously reported, (ii) requiring executive to be based other than within twenty five (25) miles of Company headquarters as of the effective date, or (iii) any other action that results in a material diminution in his position, authority, duties, responsibilities, or aggregate base salary and cash bonus.

Termination payments under the Mackin Agreement are further described and quantified under “Potential Payments Upon Termination or Change of Control – Employment, Separation and Release, and Change of Control Agreements – Employment Agreement with J. Patrick Mackin”to this Amendment No. 1 to Form 10-K.

Separation and Release Agreement with David P. Lang

See “Potential Payments upon Termination or Change of Control – Separation and Release Agreement with David P. Lang” of this Amendment No. 1 to Annual Report on Form 10-K for details regarding Mr. Lang’s separation and release agreement.

Change of Control Agreements with Other Named Executive Officers

CryoLife is not (and was not, with respect to Mr. Lang) party to agreements with Messrs. Lee, Capps, Gale, or with Ms. Holloway that provide any guarantee of employment other than as at-will employees; however, CryoLife has entered into change of control agreements with each of them, other than Mr. Lang, whose agreement was terminated upon his separation from employment with CryoLife. The change of control agreements, generally, provide that we will pay a severance payment if the officer is terminated by us without cause or terminates his or her own employment for good reason during a period extending from six months before to two years after a change of control of CryoLife. This is a “double-trigger” provision that requires not only a change of control of CryoLife but also a termination of employment. See “Potential Payments upon Termination or Change of Control – Change of Control Agreements with Other Named Executive Officers” for further details regarding these agreements.

Plan-Based Awards

Equity Awards

Equity awards, including long-term performance awards, granted in fiscal 2015 to our named executive officers were subject to the terms of our Equity and Cash Plan.

Annual Performance-Based Bonus Program

The 2015 bonus program under the 2007 Executive Incentive Plan provided for bonuses based on a percentage of participants’ 2015 base salaries, varying among participants, based on three areas:

Revenues

Adjusted net income

Personal performance rating

All bonus criteria relate to company and individual performance for the full 2015 fiscal year. See the “Compensation Discussion and Analysis” to this Amendment No. 1 to Annual Report on Form 10-K for further details regarding the 2015 fiscal year plan and results.

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2015(*)

Option Awards

  Stock Awards 

Name

 Number of
Securities
Underlying
Unexercised
Options
Exercisable

(#)
  Number of
Securities
Underlying
Unexercised
Options

Unexercisable
(#)
  Option
Exercise Price

($)
  Option
Expiration Date
  Number
of
shares
or units
of stock
that
have
not

vested
(#)
  Market
Value of
shares or
units of
stock that
have not
vested

($)
  Equity
incentive
plan
awards:
number

of
unearned
shares,
units

or other
rights
that have
not
vested

(#)
  Equity
incentive
plan
awards:
market or
payout
value of
unearned

shares, units
or other
rights that
have not
vested

($)
 
(a) (b)  (c)  (d)  (e)  (f)  (g)  (h)  (i) 

J. Patrick Mackin

        250,000(2)   2,695,500  
  133,334    266,666(1)  $10.18    9/2/2021      
   85,105(13)  $11.00    2/19/2022      
      30,832(12)  $332,369    
      39,878(16)  $429,880    

D. Ashley Lee

  20,700    $4.83    2/23/2016      
  33,333    $7.01    2/22/2017      
  63,333    $5.12    2/23/2018      
  16,666    $5.67    2/18/2019      
  11,111    5,555(4)  $6.12    2/15/2020      
  5,556    11,110(5)  $9.97    2/26/2021      
   34,042(13)  $11.00    2/19/2022      
      16,667(7)  $179,670    
      16,667(8)  $179,670    
      12,333(12)  $132,950    
      4,167(11)  $44,915    
      15,951(16)  $171,955    
      4,843(10)  $52,208    

Scott B. Capps

  15,000    $4.83    2/23/2016      
  16,667    $7.01    2/22/2017      
  31,333    $5.12    2/23/2018      
  8,332    $5.67    2/18/2019      
  6,667    3,333(4)  $6.12    2/15/2020      
  3,334    6,666(5)  $9.97    2/26/2021      
   20,425(13)  $11.00    2/19/2022      
      10,000(7)  $107,800    
      10,000(8)  $107,800    
      7,399(12)  $79,761    
      2,500(11)  $26,950    
      9,570(16)  $103,162    
      2,905(10)  $31,316    

David C. Gale

  3,000    $7.01    2/22/2017      
  10,000    $5.67    2/18/2019      
  6,667    3,333(4)  $6.12    2/15/2020      
  3,334    6,666(5)  $9.97    2/26/2021      
   20,425(13)  $11.00    2/19/2022      
      10,000(7)  $107,800    
      10,000(8)  $107,800    
      7,399(12)  $79,761    
      2,905(10)  $31,316    
      2,500(11)  $26,950    
      9,570(16)  $103,162    

Jean F. Holloway

   20,307(15)  $9.64    9/10/2022      
   7,000(14)  $10.28    4/1/2022      
      7,000(18)  $75,460    
      7,252(19)  $78,177    
      9,380(17)  $101,112    

David P. Lang**

  25,000    $6.11    10/1/2017      
  6,666    $5.67    2/18/2019      
  6,667    $6.12    2/15/2020      
  3,334    $9.97    2/26/2021      

*All values in this table are based on the closing price of the Company’s common stock on the NYSE on December 31, 2015 of $10.78.
**Effective as of September 8, 2015, in connection with Mr. Lang’s retirement and pursuant to the terms of his separation agreement, his outstanding unvested stock options, restricted stock awards, and performance stock units were forfeited. In accordance with the applicable stock plans and stock option agreements, his outstanding stock options will expire as of the later of the respective option expiration dates noted above in column (f) or September 8, 2018, 36 months following the effective date of his separation from the Company.

Type of GrantGrant Date

Vesting Rate

Vesting Dates

Conditions

(1)Service-based stock options9/2/2014331/3% per year9/2/2015

9/2/2016

9/2/2017

Continued employment through vesting date required
(2)Performance and service-based restricted stock9/2/2014100% cliff vesting9/2/2017Continued employment through vesting date required; also, we must achieve at least $20 million in adjusted EBITDA over any four consecutive calendar quarters prior to the vesting date
(4)Service-based stock options2/15/2013331/3% per year2/15/2014

2/15/2015

2/15/2016

Continued employment through vesting date required
(5)Service-based stock options2/26/2014331/3% per year2/26/2015

2/26/2016

2/26/2017

Continued employment through vesting date required
(7)Service-based restricted stock2/12/2013100% cliff vesting2/12/2016Continued employment through vesting date required
(8)Service-based restricted stock2/26/2014100% cliff vesting2/26/2017Continued employment through vesting date required
(10)Performance stock units2/12/2013

50% on first anniversary of grant date

25% on second anniversary of grant date

25% on third anniversary of grant date

2/12/2014

2/12/2015

2/12/2016

Number of shares earned based on adjusted EBITDA performance for fiscal 2013, which the Compensation Committee determined in February 2014 to be 116.2% of the target award. Number of shares shown reflects the number of shares remaining after the first vesting tranche on 2/12/2014.

Continued employment through vesting date required

(11)Performance stock units2/26/2014

50% on first anniversary of grant date

25% on second anniversary of grant date

25% on third anniversary of grant date

2/26/2015

2/26/2016

2/26/2017

Number of shares earned based on adjusted EBITDA performance for fiscal 2014, which the Compensation Committee determined in February 2015 to be 50% of the target award. Number of shares shown reflects the number of shares remaining after the first vesting tranche no 2/26/15.

Continued employment through vesting date required

(12)Service-based restricted stock2/19/2015100% cliff vesting2/19/2018Continued employment through vesting date required
(13)Service-based stock options2/19/2015331/3% per year2/19/2016

2/19/2017

2/19/2018

Continued employment through vesting date required
(14)Service-based stock options4/1/2015331/3% per year4/1/2016

4/1/2017

4/1/2018

Continued employment through vesting date required
(15)Service-based stock options9/10/2015331/3% per year9/10/2016

9/10/2017

9/10/2018

Continued employment through vesting date required
(16)Performance stock units2/19/2015

50% on first anniversary of grant date

25% on second anniversary of grant date

25% on third anniversary of grant date

2/19/2016

2/19/2017

2/19/2018

Number of shares earned based on adjusted EBITDA performance for fiscal 2015, which the Compensation Committee determined in February 2016 to be 136.7% of the target award. Number of shares shown reflects the total number of shares earned, as none of the shares had vested as of 12/31/2015.

Continued employment through vesting date required

(17)Performance stock units9/10/2015

50% on 2/19/2016, first anniversary of grant date of units granted to other NEOs

25% on 2/19/2017, second anniversary of grant date of units granted to other NEOs

25% on 2/19/2018, third anniversary of grant date of units granted to other NEOs

2/19/2016

2/19/2017

2/19/2018

Number of shares earned based on adjusted EBITDA performance for fiscal 2015, which the Compensation Committee determined in February 2016 to be 136.7% of the target award. Number of shares shown reflects the total number of shares earned, as none of the shares had vested as of 12/31/2015.

Continued employment through vesting date required

(18)Service-based restricted stock4/1/2015100% cliff vesting4/1/2018Continued employment through vesting date required
(19)Service-based restricted stock9/10/2015100% cliff vesting9/10/2018Continued employment through vesting date required

OPTION EXERCISES AND STOCK VESTED(1)

   Option Awards   Stock Awards 

Name

  Number of
Shares
Acquired
on Exercise
(#)
   Value Realized
on Exercise(2)
($)
   Number of
Shares
Acquired
on Vesting
(#)
   Value Realized
on Vesting(3)
($)
 
(a)  (b)   (c)   (d)   (e) 

J. Patrick Mackin

   N/A     N/A     N/A     N/A  

D. Ashley Lee

   16,800     103,489     30,893     335,037  

Scott B. Capps

   N/A     N/A     16,345     177,480  

David C. Gale

       18,534     201,003  

Jean F. Holloway

       N/A     N/A  

David P. Lang

       14,158     153,978  

(1)This table provides information regarding stock option exercises and vesting of restricted stock and performance stock units during 2015.
(2)Value Realized on Exercise is equal to the number of shares acquired multiplied by the difference between the exercise price and the closing share price on the NYSE on the date of exercise without regard to any proceeds that may have been received upon any sale of the underlying shares.
(3)Value Realized on Vesting is equal to the number of shares acquired multiplied by the closing share price on the NYSE on the date of vesting, without regard to any proceeds that may have been received upon any sale of the underlying shares.

NONQUALIFIED DEFERRED COMPENSATION

The following table presents components of nonqualified deferred compensation under the Executive Deferred Compensation Plan for each named executive officer.For a description of the terms of the Executive Deferred Compensation Plan, see “2015 Deferred Compensation.”

Name

  Executive
Contributions in
Fiscal 2015(1)

($)
   Company
Contributions in
Fiscal 2015

($)
   Aggregate
Earnings in
Fiscal 2015(2)

($)
  Aggregate
Withdrawals and
Distributions in
Fiscal 2015

($)
   Aggregate
Balance at
December 31,
2015(3)

($)
 
(a)  (b)   (c)   (d)  (e)   (f) 

J. Patrick Mackin

   —       —       —      —       —    

D. Ashley Lee

   76,877     —       (27,738  —       516,246  

Scott B. Capps

   11,122     —       (59  —       72,577  

David C. Gale

   46,868     —       (7,743  —       193,797  

Jean F. Holloway

   50,000     —       (433  —       49,567  

David P. Lang

   116,713     —       —      —       552,681  

(1)Contributions to the Executive Deferred Compensation Plan that relate to an executive’s deferrals from salary and/or annual short-term incentives are included in the amounts reflected in the “Salary,” “Bonus,” and/or “Non-Equity Incentive Plan Compensation” columns, as applicable, of the “Summary Compensation Table” hereto.
(2)A participant’s account under the Executive Deferred Compensation Plan is deemed to be invested in hypothetical investment options selected by the participant from among a menu of non-proprietary mutual funds. The account is credited/debited with gains and/or losses linked to the performance of those hypothetical investment options. The plan does not have investment options that provide for above-market or preferential earnings; accordingly, the amounts provided in this column are not included in column (h) of the “Summary Compensation Table” hereto.
(3)Amounts shown include the executive’s contributions and associated hypothetical gains/losses during 2015, as well as deferrals of salary and annual incentives (together with associated hypothetical earnings) from prior years’ participation in the plan. The amounts shown in this column, with the exception of aggregate earnings, have been reported in the “Salary,” “Bonus,” and/or “Non-Equity Incentive Plan Compensation” columns, as applicable, of the Summary Compensation Table of prior year Company proxy statements, if the individuals were listed as NEOs in those prior year periods. The total prior year contributions to the Executive Deferred Compensation Plan are as noted in the table below:

Name

Amount of
Contributions
Prior to 2015

($)

J. Patrick Mackin

—  

D. Ashley Lee

467,107

Scott B. Capps

61,514

Gale

154,672

Holloway

—  

Lang

435,968

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

We have entered into certain agreements and maintain certain plans that will require us to provide compensation to the named executive officers in the event of specified terminations of their employment or upon a change of control of CryoLife.

Employment, Separation and Release, and Change of Control Agreements

Employment Agreement with J. Patrick Mackin

Pursuant to the Mackin Agreement, Mr. Mackin will receive certain compensation upon termination of his employment, other than termination for cause or voluntary termination without good reason.

Separation and Release Agreement with David P. Lang

On September 8, 2015, David P. Lang, our former Senior Vice President, International Sales & Marketing, and CryoLife entered into a Separation and Release Agreement (the “Lang Agreement”) that became effective on October 13, 2015. The Lang Agreement provides for the termination of Mr. Lang’s employment, effective September 8, 2015.

The Lang Agreement provided that Mr. Lang would receive the following payments and benefits:

A total gross amount of $276,000, which represents twelve (12) months’ base salary, payable as a one-time sum, on January 31, 2017;

An additional lump sum in the amount of $13,847, which is an amount equivalent to twelve (12) months of COBRA coverage, such amount to be paid the first day following the effective date;

Payment of Mr. Lang’s 2015 bonus, pro-rated based on the number of days that Mr. Lang was employed by us during 2015, with Mr. Lang deemed to have met or exceeded his personal performance goals for 2015;

Provide up to twelve (12) months of outplacement services through an outplacement provider selected by Mr. Lang and approved by us, in an amount not to exceed $15,000;

The benefits that accrue to an employee upon retirement pursuant to our stock plans, including, without limitation, that his options granted pursuant to applicable option agreements shall remain exercisable, to the extent vested as of September 8, 2015, until the earlier of the end of the applicable option term or thirty-six months from September 8, 2015.

In return for the benefits described above, Mr. Lang agreed to release and forever discharge CryoLife and certain related parties, including present and former officers and Directors of CryoLife, from any and all claims and causes of action that Mr. Lang had or may have in the future that are based on acts or facts arising or occurring prior to the effective date of the Lang Agreement. Mr. Lang also agreed that he would (i) protect certain confidential information, proprietary information and trade secrets of CryoLife and, (ii) for a period of 24 months after the effective date of the agreement, (A) not solicit any customers or active prospects of CryoLife on behalf of a competing business with whom he had material contact while employed at CryoLife and (B) not, within the State of

Georgia, solicit or induce any employees of CryoLife to terminate their employment with CryoLife. For a twelve month period after the effective date of the Lang Agreement, Mr. Lang, upon reasonable request by us, agreed to provide us with information and assistance up to four hours per week. The Lang Agreement also contains a mutual non-disparagement provision and provides that the Change of Control Agreement by and between Mr. Lang and CryoLife has been terminated.

Change of Control Agreements with Other Named Executive Officers

Messrs. Lee, Capps, Gale, and Ms. Holloway do not have agreements that provide any guarantee of employment other than as at-will employees; however, CryoLife has entered into change of control agreements with each of them that provide that we will pay severance payments if they are terminated by us without cause or terminate their employment for good reason during a period extending from six months before to two years after a change of control of CryoLife. This is a “double trigger” provision that requires not only a change of control of CryoLife but also a termination of employment.

Terms of the Change of Control Agreements

The current term of the agreement for each Messrs. Lee, Capps, Gale and Ms. Holloway ends September 1, 2017. Each of these agreements will automatically renew at the end of the term and every three years thereafter, for an additional three-year term, unless CryoLife provides notice at least thirty days prior to the end of the then-current term that the agreement will not be extended.

The severance payment is an amount equal to a multiple of the sum of the executive’s base salary as of the date of termination and his or her bonus compensation for the year in which the termination of employment occurs, or if the bonus for that year has not yet been awarded, the most recently awarded bonus compensation. The multiple for Mr. Lee is two times base salary and bonus, and the multiple for Messrs. Capps and Gale, and Ms. Holloway is one times base salary and bonus.

Change of control, as defined in Part I, Item I, “Business” and other FDA activity. During the third quarteragreement, means a change in the ownership of 2006CryoLife, a change in the Company recognizedeffective control of CryoLife, or a net $2.1 million gain related tochange in the settlementownership of insurance coverage disputes. The Company also recorded favorable adjustments during 2006 to reduce the levels of its legal reserves for unreported product liability claims in accordance with new actuarial valuations, as the amount of new product liability claims brought against the Company and the expense related to product liability claims continued to decline from the levels experienced in 2002 and 2003.

During the fourth quarter of 2006 the Company began focusing its efforts on new strategic initiatives. On November 2, 2006 the Company announced the successful conclusion of its strategic review begun in January 2006 at the requesta substantial portion of the Company’sassets of CryoLife. Specifically, any of the following types of events would constitute a change of control under the agreements:

Any person, including a syndicate or group, acquires ownership of CryoLife stock that, taken together with CryoLife stock held by such person or group, constitutes more than 50% of the total voting power of the stock of CryoLife

Any person, including a syndicate or group, acquires ownership of stock of CryoLife possessing 30% or more of the total voting power of CryoLife stock

A majority of the members of CryoLife’s Board of Directors and with the assistanceare replaced during any 12-month period by individuals whose appointment or election is not endorsed by a majority of Piper Jaffray & Co. As a result of this review, the Board of Directors directed management to actively pursue three key strategies in addition to continuing to focus on growing its business and leveraging its strengths and expertise in its core marketplaces. These three strategies are designed to generate revenue and earnings growth: identify and evaluate acquisition opportunities of complementary product lines and companies, license Company technology to third parties for non-competing uses, and analyze and identify underperforming assets for potential sale or disposal. Subsequent to conclusion of this strategic review, the Company has announced several initiatives which management believes will benefit the Company with future revenue and earnings growth. Agreements reached with BioForm Medical, Inc., Regeneration Technologies Inc. (“RTI”), Cleveland Clinic, and MAST Biosurgery, Inc. are discussed in more detail in Part I, Item I, “Business”. The Company is continuing to review opportunities to implement its three key strategies and enhance the Company’s performance in the coming years.

See Part I, Item 1, “Business,” for further discussion of the Company’s business and activities during 2006.

Recent Events

On December 19, 2006 CryoLife announced that they had entered into an exchange and service agreement with Regeneration Technologies, Inc., and certain of its affiliates, (collectively, “RTI”), respecting procurement, processing, and distribution activities for cardiovascular and vascular tissue processed and distributed by RTI and orthopaedic tissue for the knee processed and distributed by CryoLife (“RTI Agreement”). According to the RTI Agreement, CryoLife ceased accepting for processing donated human orthopaedic tissue commencing January 1, 2007 and will work to transition existing arrangements for recovery of human orthopaedic tissue to RTI. Likewise, on January 1, 2007 RTI ceased accepting donated human cardiovascular and vascular tissues for processing and will work to transition its arrangements for recovery of these tissues to CryoLife. Certain physical assets relating to the tissues that are the subject of the agreement may also be transferred between the parties. No cash was exchanged in the transaction. CryoLife will continue to distribute its existing orthopaedic tissue inventory, and RTI will continue to distribute its existing cardiovascular and vascular tissue inventory, through June 30, 2008. After that date CryoLife will become entitled to distribute RTI’s remaining cardiovascular and vascular tissue inventory, and RTI will become entitled to distribute CryoLife’s remaining orthopaedic tissue inventory, for a fee. Under the RTI Agreement, from July 1, 2008 through December 31, 2016, except as set forth above, CryoLife has agreed not to market or solicit orders for certain human orthopaedic tissues and RTI has agreed not to market or solicit orders for human cardiac and vascular tissues. The agreement also provides for a non-exclusive license of technology from CryoLife to RTI, and contains customary provisions regarding indemnification and confidentiality.

Critical Accounting Policies

A summary of the Company’s significant accounting policies is included in Item 8, “Note 1 of the Notes to Consolidated Financial Statements.” Management believes that the consistent application of these policies enables the Company to provide users of the financial statements with useful and reliable information about the Company’s operating results and financial

43


condition. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions. The following are accounting policies that management believes are most important to the portrayal of the Company’s financial condition and results and may involve a higher degree of judgment and complexity.

Product Liability Claims:In the normal course of business as a medical device and services company, the Company has product liability complaints filed against it. As of February 16, 2007 the Company was aware of three pending product liability lawsuits. The lawsuits are currently in the pre-discovery or discovery stages. Of these lawsuits, two allege product liability claims arising out of the Company’s allograft heart valve tissue services, and one alleges a product liability claim arising from allograft orthopaedic tissue services.

Two of the outstanding product liability lawsuits against the Company are not covered by insurance policies, as the claimed loss date was prior to the effective coverage date for the insurance policy. Additional uninsured claims may be filed in the future. Other product liability claims have been asserted against the Companyof appointment or election

Any person, including a syndicate or group, acquires assets from CryoLife that have not resulted in lawsuits as of February 16, 2007. The Company is monitoring these claims.

The Company performed an analysis as of December 31, 2006 of the settled but unpaid claims and the pending product liability claims based on settlement negotiations to date and advice from counsel. As of December 31, 2006 the Company had accrued a total of approximately $330,000 for pending product liability claims. The $330,000 accrual is included as a component of accrued expenses and other current liabilities on the December 31, 2006 Consolidated Balance Sheet. This amount represents the Company’s estimate of the probable losses relatedgross fair market value equal to one of the three pending product liability claims. The Company has not recorded an accrual for the remaining two product liability claims because management has concluded that either a loss is remote or that, although a loss is reasonably possible or probable, a reasonable estimate of that loss or the range of losses cannot be made at this time. As of December 31, 2005 the Company had accrued a total of approximately $1.5 million for settled but unpaid claims and pending product liability claims and recorded $244,000 representing amounts to be recovered from the Company’s insurance carriers. The $1.5 million accrual is included as a component of accrued expenses and other current liabilities on the December 31, 2005 Consolidated Balance Sheet.

If the Company is unable to settle one or more of the product liability lawsuits in which the Company is a defendant, and if any such lawsuit should be tried with a substantial verdict rendered in favor of the plaintiff(s), there can be no assurance that such verdict(s) would not exceed the Company’s available liquid assets. Additionally, the Company does not have a reasonable method for estimating the amount of compensatory or punitive damages that could be assessed by a trial jury with respect to any lawsuit that it is unable to settle prior to trial, and the Company’s product liability insurance policies do not include coverage for any punitive damages. Failure by the Company to resolve the outstanding product liability claims within its ability to pay would have a material adverse effect on the financial position, results of operations, and cash flows of the Company.

On April 1, 2006 the Company bound coverage for the 2006/2007 insurance policy year. This policy is a four-year claims-made insurance policy, i.e. claims incurred during the period April 1, 2003 through March 31, 2007 and reported during the period April 1, 2006 through March 31, 2007 are covered by this policy. Claims incurred prior to April 1, 2003 that have not been reported are uninsured.

The Company maintains claims-made insurance policies to mitigate its financial exposure to product liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. The Company periodically evaluates its exposure to unreported product liability claims and records accruals as necessary for the estimated cost of unreported claims related to services performed and products used. In January 2007 the Company retained an independent actuarial firm to perform revised estimates of the unreported claims as of December 31, 2006. The independent firm estimated the unreported product loss liability using a frequency-severity approach, whereby projected losses were calculated by multiplying the estimated number of claims by the estimated average cost per claim. The estimated claims were calculated based on the reported claim development method and the Bornhuetter-Ferguson method using a blend of the Company’s historical claim experience and industry data. The estimated cost per claim was calculated using a lognormal claims model blending the Company’s historical average cost per claim with industry claims data. The independent actuarial firm used a number of assumptions in order to estimate the unreported product loss liability including:

A ceiling of $5.0 million was selected for actuarial purposes in determining the liability per claim given the uncertainty in projecting claim losses in excess of $5.0 million,

44


The future claim reporting lag time would be a blend of the Company’s experiences and industry data,

The frequency of unreported claims for accident years 2001 through 2006 would be lower than the Company’s experience in the 2002/2003 policy year, but higher than the Company’s historical claim frequency prior to the 2002/2003 policy year,

The average cost per claim would be lower than the Company’s experience since the 2002/2003 policy year, but higher than the Company’s historical cost per claim prior to the 2002/2003 policy year,

The average cost per BioGlue claim would be consistent with the Company’s overall historical exposures until adequate historical data is available on this product line, and

The number of BioGlue claims per million dollars of BioGlue revenue would be 40% lower than non-BioGlue claims per million dollars of revenue. The 40% factor was selected based on BioGlue claims experience to-date and consultation with the actuary.

The Company believes that these assumptions provide a reasonable basis for the calculation of the unreported product liability loss, but accuracy of the actuarial firm’s estimates is limited by the general uncertainty that exists for any estimate of future activity due to uncertainties surrounding the assumptions used and due to Company specific conditions, including the Company’s increased litigation activity following the FDA Order, the Company’s low volume of pre-FDA Order historical claims, and the scarcity of industry data directly relevant to the Company’s business activities. Due to these factors, actual results may differ significantly from the assumptions used and amounts accrued.

Based on the actuarial valuation performed in January 2007 as of December 31, 2006, the Company estimated that its liability for unreported product liability claims was $6.6 million. In accordance with Emerging Issues Task Force Issue 03-8, the Company has accrued $6.6 million, representing the Company’s best estimate of the total liability for unreported product liability claims related to services performed and products soldgross fair market value of all CryoLife assets immediately prior to December 31, 2006. such acquisition

The $6.6 million balanceagreements are not employment agreements, and each respective officer’s employment is included as“at will.”

We will not be required to make a componentseverance payment in connection with the change of accrued expenses andcontrol agreements if we terminate an executive’s employment for cause, which means:

An intentional act of fraud, embezzlement, theft, or any other current liabilitiesmaterial violation of $3.3 million and other long-term liabilities of $3.3 million onlaw that occurs during or in the December 31, 2006 Consolidated Balance Sheet. Further analysis indicated that the liability could be estimated to be as high as $12.3 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques. Based on the actuarial valuation, the Company estimated that as of December 31, 2006, $2.3 millioncourse of the accrual for unreported liability claims would be recoverableexecutive’s employment with CryoLife

Intentional damage by the executive to CryoLife assets

Intentional disclosure by the executive of CryoLife’s confidential information contrary to CryoLife policies

Material breach of the executive’s obligations under the Company’s insurance policies. The $2.3 million insurance recoverable is included as a component of other receivables of $1.1 million and other long-term assets of $1.2 million on the December 31, 2006 Consolidated Balance Sheet. These amounts represent management’s estimate of the probable losses and anticipated recoveries for unreported product liability claims related to services performed and products sold prior to December 31, 2006. Actual results may differ from this estimate.

As of December 31, 2005 the Company accrued $7.5 million for unreported product liability claims and recorded a receivable of $2.5 million for unreported liability claims estimated to be recoverable under the Company’s insurance policies. This $7.5 million accrual is included as a component of accrued expenses and other current liabilities of $3.8 million and other long-term liabilities of $3.7 million on the December 31, 2005 Consolidated Balance Sheet. The $2.5 million insurance recoverable is included as a component of other current receivables of $1.1 million and other long-term assets of $1.4 million on the December 31, 2005 Consolidated Balance Sheet.

Deferred Preservation Costs:By federal law, human tissues cannot be bought or sold. Therefore, the tissues the Company preserves and further processes cannot be held as inventory. Tissue is procured from deceased human donors by organ and tissue procurement agencies, which consign the tissue to the Company for processing, preservation, and distribution. Preservation costs consist primarily of direct labor and materials (including laboratory expenses, tissue procurement fees, freight-in charges, and fringe benefits) and indirect costs (including allocations of costs from departments that support processing activities and facility allocations). Although the Company cannot own human tissue, the preservation process is a manufacturing process that is accounted for in accordance with Accounting Research Bulletin No. 43 (“ARB 43”) Chapter 4, Inventory Pricing. Preservation costs are stated at the lower of cost or market on a first-in, first-out basis and are deferred until revenue is recognized upon shipment of the tissue to the implanting facilities.

The calculation of deferred preservation costs includes a high degree of judgment and complexity. The costs included in deferred preservation costs contain several estimates due to the timing differences between the occurrence of the cost and

agreement

 

45


receipt of final bills for services. Costs that contain estimates include tissue procurement fees, which are estimated based on the Company’s contracts with independent procurement agencies, and freight-in charges, which are estimated based on the Company’s prior experiences with these charges. These costs are adjusted for differences between estimated and actual fees when invoices for these services are received. Management believes that its estimates approximate the actual costs of these services, but estimates could differ from actual costs. Total deferred preservation costs are then allocated among the different tissues processed during the period based on specific cost drivers such as the number of donors and the number of tissues processed. At each balance sheet date a portion of the deferred preservation costs relates to tissues currently in active processing or held in quarantine pending release to implantable status. The Company applies a yield estimate to all tissues in process and in quarantine to estimate the portion of tissues that will ultimately become implantable. Management determines this estimate of quarantine yields based on its experience in prior periods and reevaluates this estimate periodically. Due to the nature of this estimate and the length of the processing times experienced

Intentional engagement by the Company, actual yields could differ fromexecutive in any activity that would constitute a breach of his duty of loyalty or of his assigned duties

Intentional breach by the Company’s estimates. A significant change in quarantine yields could materially impactexecutive of any of CryoLife’s policies and procedures

The willful and continued failure by the amount of deferred preservation costs on the Company’s Consolidated Balance Sheets and the cost of preservation services, including the lower of cost or market write-down, described below, on the Company’s Consolidated Statements of Operations.

The Company regularly evaluates its deferred preservation costsexecutive to determine if the costs are appropriately recorded at the lower of cost or market value and to determine if there are any impairments to the book value of the Company’s deferred preservation costs. The Company recorded a write-down of $2.8 million in the year ended December 31, 2006 due to the impairment of certain orthopaedic tissues and processing materialsperform his assigned duties, other than as a result of incapacity due to physical or mental illness

Willful conduct by the RTI Agreement discussed above. This write-downexecutive that is based on the Company’s estimatedemonstrably and materially injurious to CryoLife, monetarily or otherwise

An executive may terminate his or her employment for good reason in connection with a change of control without forfeiting his or her severance pay if any of the tissues that will be shippedfollowing events occur during the 18-monthterm of the agreement:

The assignment to the executive, without his or her consent, of any duties materially inconsistent with his or her position, authority, duties, or responsibilities, including changes in status, offices, or titles and any change in the executive’s reporting requirements that would cause him or her to report to an officer who is junior in seniority to the officer to whom he or she previously reported

Any other action by CryoLife that results in a material diminution in his or her position, authority, duties, responsibilities, or aggregate compensation, excluding for this purpose an isolated, insubstantial, and inadvertent action taken in good faith and which is remedied by CryoLife within thirty (30) days after receipt of notice from the executive

The change of control agreements provide that we will pay any severance payment due in a lump sum not later than 30 days following the date of termination, or 30 days following a change of control in the event of an anticipatory termination. We will delay payment of the severance payment until six months after the executive’s termination if necessary to prevent him or her from having to pay additional tax under Section 409A of the Internal Revenue Code. We will also subject any severance payment to normal payroll tax withholding.

Agreement Not to Solicit

Messrs. Lee, Capps, and Gale, and Ms. Holloway agree not to solicit any actual or prospective customers of CryoLife with whom they have had contact for a competing business or to solicit employees of CryoLife to leave CryoLife, and, for Ms. Holloway, subject to applicable professional and ethical obligations and other legal requirements, join a competing business during the term of the agreement and for a period subsequentof one year following the termination of the agreement. CryoLife is not required to December 31, 2006 in whichmake the Company can continueseverance payment, and the officer is required to distribute its orthopaedic tissues. repay any portion of the severance payment already received if he or she solicits customers or employees of CryoLife during the term of the agreement and for a period of one year following the termination of the agreement.

Termination and Change of Control Payments

The amount of tissues shipped during that period could differ significantly from this initial estimate resulting in higher margins on shipments of orthopaedic tissues during the 18-month period or additional write-downs in future periods.

The Company also recorded $1.2 million in the year ended December 31, 2006 and $1.8 million in the year ended December 31, 2005 as an increase to cost of preservation services to write-down the value of certain deferred tissue preservation costs that exceeded market value. The amount of these write-downs are primarily due to excess current period tissue processing costs that exceeded market value based on recent average service fees. Actual results may differ from these estimates.

The Company regularly evaluates its deferred preservation costs to determine if an impairment in the value of the deferred preservation costs is required when the value of these tissues is not expected to be fully recoverable. A write-down of $588,000 was recorded for the year ended December 31, 2006 due to the impairment of certain orthopaedic tissues.

As of December 31, 2006 deferred preservation costs consisted of $4.7 million for allograft heart valve tissues, $1.0 million for non-valved cardiac tissues, $11.3 million for vascular tissues, and $2.3 million for orthopaedic tissues.

Deferred Income Taxes:Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when it is more likely than not that the full value of a deferred tax asset will not be recovered.

The Company assesses the recoverability of its deferred tax assets on an annual basis, and on an interim basis, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. Management provides a valuation allowance when, as a result of this analysis, management believes it is more likely than not that its deferred tax assets will not be realized. In assessing the recoverability of its deferred tax assets at December 31, 2006 the Company reviewed its historical operating results, including the reasons for its operating losses in prior years, and uncertainties regarding projected future operating results. Based on the results of this analysis, at December 31, 2006 the Company determined that it was more likely than not that the Company’s deferred tax assetscompensation we would not be realized. Therefore, as of December 31, 2006 the Company had a total of $33.0 million in valuation allowances against deferred tax assets and a net deferred tax liability of $226,000 related to taxes in a foreign jurisdiction.

The realizability of the Company’s deferred tax assets could be limited in future periods as mandated by Internal Revenue Service Section 382.

46


Valuation of Long-lived and Intangible Assets and Goodwill: The Company assesses the impairment of its long-lived, identifiable intangible assets and related goodwill annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that management considers important that could trigger an impairment review include the following:

Significant underperformance relative to expected historical or projected future operating results,

Significant negative industry or economic trends,

Significant decline in the Company’s stock price for a sustained period, and

Significant decline in the Company’s market capitalization relative to net book value.

Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), requires the write-down of a long-lived asset to be held and used if the carrying value of the asset or the asset group to which the asset belongs is not recoverable. The carrying value of the asset or asset group is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset or asset group. In applying SFAS 144 the Company defined the specific asset groups used to perform the cash flow analysis. The Company defined the asset groups at the lowest level possible, by identifying the cash flows from groups of assets that could be segregated from the cash flows of other assets and liabilities. Using this methodology the Company determined that its asset groups consisted of the long-lived assets related to the Company’s two reporting segments. As the Company does not segregate assets by segment the Company allocated assets to the two reporting segments based on factors including facility space and revenues. The undiscounted future cash flows related to these asset groups exceeded their carrying values as of December 31, 2006 and 2005 and, therefore, management concluded that there was not an impairment of the Company’s long-lived intangible assets and tangible assets related to the tissue preservation business or medical device business. Management will continue to evaluate the recoverability of these assets in accordance with SFAS 144.

SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), requires that goodwill resulting from business acquisitions and other intangible assets be subject to periodic impairment testing. The Company’s intangible assets consist of patents and trademarks. In addition, during 2006, the Company acquired customer lists, non-compete agreements, procurement contracts and access to the procurement of cardiovascular and vascular human tissues previously received by RTI as a result of the RTI Agreement discussed in Recent Events above. The Company amortizes its definite lived intangible assets over their expected useful lives using the straight-line method. As of December 31, 2006 and 2005 the Company did not believe that an impairment existed related to its intangible assets.

Derivative Instruments: The terms of the Company’s first quarter 6% convertible Preferred Stock offering include a Dividend Make-Whole Payment. If the Company elects to automatically convert, or the holder elects to voluntarily convert, some or all of the Preferred Stock into common stock prior to April 1, 2008, the Company will make an additional payment on the Preferred Stock equal to the aggregate amount of dividends that would have been payable on the Preferred Stock through and including April 1, 2008, less any dividends already paid on the Preferred Stock. The Dividend Make-Whole Payment is payable in cash or, at the Company’s option, in shares of the Company’s common stock, or a combination of cash and shares of common stock. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), the Company is required to separate and account for, as an embedded derivative, the Dividend Make-Whole Payment feature of the Preferred Stock, (the “Derivative”). As an embedded derivative instrument, the Dividend Make-Whole Payment feature must be measured at fair value and reflected as a current liability on the Company’s Consolidated Balance Sheets. Changes in the fair value of the Derivative are recognized as the line item change in valuation of derivative as non-operating income/expense on the Company’s Consolidated Statements of Operations.

The accounting for derivatives is complex, and requires significant judgments and estimates in determining the fair value in the absence of quoted market values. These estimates are based on valuation methodologies and assumptions deemed appropriate in the circumstances. The fair value of the Dividend Make-Whole Payment feature is based on various assumptions, including the estimated market volatility and discount rates. The use of different assumptions may have a material effect on the estimated fair value amount, which is reflected in the Company’s results of operations and financial position.

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New Accounting Pronouncements

The Company will be required to adopt Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretationpay to each named executive officer under certain termination and change of FASB Statement No. 109” (“FIN 48”) for the fiscal year beginning January 1, 2007. FIN 48 establishes a threshold for recognizing tax benefits if they are “more-likely-than-not” to be upheld upon review by the appropriate taxing authority and the requirement that companies recognize the maximum amount of tax benefit that has a “greater than 50 percent likelihood” of ultimately being realized. The cumulative effect of adoption of this interpretation will be reported as an adjustment to the opening balance of retained earnings. The Company does not anticipate that the adoption of FIN 48 will have a material affect on its results of operations or financial position, although the Companycontrol scenarios is continuing to evaluate the full impact of the adoption of FIN 48.

The Company will be required to adopt SFAS No. 157 “Fair Value Measurements” (“SFAS 157”) for the fiscal year beginning January 1, 2008. SFAS 157 provides a single definition of fair value and a hierarchical framework for measuring it, as well as establishing additional disclosure requirements about the use of fair value to measure assets and liabilities. The Company isprovided in the process of evaluating the impact of SFAS 157 on its results of operations and financial position.

The Company was required to adopt Staff Accounting Bulletin (“SAB”) No. 108, codified as SAB Topic 1.N, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”) for the year ended December 31, 2006. SAB 108 requires the use of both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. Adjustment to the financial statements is required if either approach results in quantifying a misstatement that is material. The adoption of SAB 108 did not have an impact on the Company’s results of operations and financial position.

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Results of Operations

(In thousands)

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenues

   Three Months Ended
December 31,
  Twelve Months Ended
December 31,
   2006  2005  2006  2005

Revenues

  $21,090  $17,961  $81,311  $69,282

Revenues increased 17% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005. The increase was primarily due to an increase in tissue preservation service revenues, as well as an increase in BioGlue revenues as compared to the prior year period.

Revenues increased 17% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005. The increase was primarily due to an increase in tissue preservation service revenues, as well as an increase in BioGlue revenues as compared to the prior year period.

A detailed discussion of the change in BioGlue revenues and in preservation service revenues for each of the three major tissue types processed by the Company is presentedtables below.

BioGlue

   Three Months Ended
December 31,
  Twelve Months Ended
December 31,
 
   2006  2005  2006  2005 

Revenues

  $10,491  $9,645  $40,025  $37,985 

BioGlue revenues as a percentage of total revenue

   50%  54%  49%  55%

Revenues from the sale of BioGlue increased 9% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005. This increase was primarily due to an increase in average selling prices, which increased revenues by 5%, a 2% increase in the amount of BioGlue milliliters shipped, which increased revenues by 3%, and the effect of foreign currency exchange, which increased revenues by 1%.

Revenues from the sale of BioGlue increased 5% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005. This increase was primarily due to an increase in average selling prices, which increased revenues by 5%.

The increase in average selling prices for the three and twelve months ended December 31, 2006 was primarily due to list price increases that went into effect in January and July 2006 domestically and in certain international markets. The increase in BioGlue volume for the three months ended December 31, 2006 was primarily due to an increase in unit shipments of BioGlue syringes partially offset by a decrease in BioGlue cartridge products, as more customers transition to the newer BioGlue syringe products, and a decrease in accessory sales. Accessory sales were negatively impacted by the success of the BioGlue syringe product, which does not utilize a separate delivery device or require the purchase of separate applicator tips, although a variety of optional applicator tips are available for the BioGlue syringe.

Domestic revenues accounted for 74% of total BioGlue revenues for both the three and twelve months ended December 31, 2006, and 75% and 76% of total BioGlue revenues for the three and twelve months ended December 30, 2005, respectively.

The Company anticipates that BioGlue revenues in 2007 will continue to increase due in part to domestic price increases that went into effect on July 1, 2006 and January 1, 2007 and due to projected unit growth in domestic and international markets.

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Cardiovascular Preservation Services

   Three Months Ended
December 31,
  Twelve Months Ended
December 31,
 
   2006  2005  2006  2005 

Revenues

  $4,438  $3,355  $15,988  $13,762 

Cardiovascular revenues as a percentage of total revenue

   21%  19%  20%  20%

Revenues from cardiovascular preservation services increased 32% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005. This increase was primarily due to an increase in average service fees, which increased revenues by 18%, and a 20% increase in unit shipments of cardiovascular tissues, which increased revenues by 14%.

Revenues from cardiovascular preservation services increased 16% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005. This increase was primarily due to an increase in average service fees, which increased revenues by 10%, and a 15% increase in unit shipments of cardiovascular tissues, which increased revenues by 6%.

The increase in average service fees for the three and twelve months ended December 31, 2006 was primarily due to the fee increases that went into effect in January 2006 on all cardiac tissues and in July 2006 on certain non-valved cardiac tissues. The increase in cardiovascular volume for the three and twelve months ended December 31, 2006 was primarily due to increased shipments of pulmonary valves and non-valved cardiac tissues. To a lesser extent, the three months ended December 31, 2006 also exhibited an increase in aortic valve shipments. The increases in cardiac shipments were a result of increased availability of tissues due to improvements in procurement and tissue processing yields and due to strengthening demand for the Company’s tissues, particularly in the pediatric cardiac market. The increases in the number of tissue shipments did not result in proportional increases in cardiovascular revenues due to a shift in product mix, as the increases were primarily experienced in products with smaller per unit revenues than the average cardiovascular tissue.

The Company’s procurement of cardiac tissues, from which heart valves and non-valved cardiac tissues are processed, increased 13% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005, and 12% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005.

The Company anticipates that cardiovascular service revenues in 2007 will increase due in part to the continuing effect of price increases that went into effect in 2006, price increases on certain non-valved cardiac tissues as of January 1, 2007, and projected growth in cardiovascular tissue shipments during 2007, primarily as a result of expected increases in procurement. The Company anticipates that procurement of cardiac tissues during 2007 will be favorably impacted by the RTI Agreement discussed in Recent Events above as a result of the anticipated transition of some or all of the tissue procurement previously received by RTI to the Company.

Vascular Preservation Services

   Three Months Ended
December 31,
  Twelve Months Ended
December 31,
 
   2006  2005  2006  2005 

Revenues

  $3,890  $3,172  $16,956  $11,453 

Vascular revenues as a percentage of total revenue

   18%  18%  21%  17%

Revenues from vascular preservation services increased 23% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005. This increase was primarily due to an increase in average service fees, which increased revenues by 14%, and an 8% increase in unit shipments of vascular tissues, which increased revenues by 9%.

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Revenues from vascular preservation services increased 48% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005. This increase was primarily due to a 30% increase in unit shipments of vascular tissues, which increased revenues by 36%, and an increase in average service fees, which increased revenues by 12%.

The increase in vascular volume for the three and twelve months ended December 31, 2006 is primarily due to increases in shipments of saphenous veins, due in part to increased availability of tissues as a result of improvements in procurement levels and tissue processing yields, coupled with a strong demand for these tissues, primarily for use in peripheral vascular reconstruction surgeries to avoid limb amputations. The increase in shipments of saphenous veins is a continuation of the favorable trend that began in the fourth quarter of 2005. The increase in average service fees for the three and twelve months ended December 31, 2006 was primarily due to the fee increases that went into effect in January 2006 on all vascular tissues.

The Company’s procurement of vascular tissues increased 14% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005, and 31% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005.

The Company anticipates that vascular service revenues in 2007 will increase due in part to the continuing effect of the price increase that went into effect in 2006, price increases as of January 1, 2007, and projected growth in vascular tissue shipments during 2007, as a result of expected increases in procurement. The Company anticipates that procurement of vascular tissues during 2007 will be favorably impacted by the RTI Agreement discussed in Recent Events above as a result of the anticipated transition of some or all of the tissue procurement previously received by RTI to the Company.

Orthopaedic Preservation Services

   Three Months Ended
December 31,
  Twelve Months Ended
December 31,
 
   2006  2005  2006  2005 

Revenues

  $1,911  $1,561  $7,134  $5,092 

Orthopaedic revenues as a percentage of total revenue

   9%  9%  9%  7%

Revenues from orthopaedic preservation services increased 22% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005. This increase was primarily due to an increase in average service fees, which increased revenues by 16%, and a 16% increase in unit shipments of orthopaedic tissues, which increased revenues by 6%.

Revenues from orthopaedic preservation services increased 40% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005. This increase was primarily due to a 24% increase in unit shipments of orthopaedic tissues, which increased revenues by 26% and an increase in average service fees, which increased revenues by 14%.

The increase in average service fees for the three and twelve months ended December 31, 2006 was primarily due to the fee increases that went into effect in January 2006 on all orthopaedic tissues and in July 2006 for certain orthopaedic tissues. The increase in orthopaedic volume for the three and twelve months ended December 31, 2006 was primarily due to an increase in shipments of boned tendons, and to a lesser extent shipments of non-boned tendons and menisci, primarily due to reestablishment of the Company’s presence in the orthopaedic tissue business and the rebuilding of the Company’s supply of tissues available for shipment. The increase in orthopaedic volume for the twelve months ended December 31, 2006 was also due to an increase in shipments of osteochondral grafts, which were reintroduced in a cryopreserved condition in the first quarter of 2005.

Until January 1, 2007 the Company procured orthopaedic tissues, which include knees, from which osteochondral grafts, menisci, and boned tendons are processed, and individual tendons, which are primarily non-boned. The Company’s procurement of all orthopaedic tissues decreased 13% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005, and increased 9% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005. The Company’s procurement of knees decreased 26% for the three months ended December 31, 2006 as compared to the three months ended December 31, 2005, and increased 9% for the twelve months ended December 31, 2006 as compared to the twelve months ended December 31, 2005.

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The Company anticipates that orthopaedic service revenues in 2007 will decrease significantly from 2006 due to the Company’s cessation of processing orthopaedic tissues on January 1, 2007 in accordance with the RTI Agreement discussed in Recent Events above. Although under the RTI Agreement CryoLife will continue to ship its existing orthopaedic tissues through June 30, 2008, the volume of orthopaedic tissue shipments is expected to decrease each quarter beginning with the first quarter of 2007 as the higher demand tissues and sizes are exhausted from the existing tissue inventories.

Other Revenues

Other revenues were $122,000 and $196,000 respectively, for the three and twelve months ended December 31, 2006 and $43,000 for both the three and twelve months ended December 31, 2005. Other revenues for the three and twelve months ended December 31, 2006 included revenues for research grants and revenues related to the licensing of the Company’s technology to a third party. Other revenues for the three and twelve months ended December 31, 2005 included revenues for research grants.

Grant revenues in 2005 and 2006 are related to funding received under the U.S. Congress 2005 Defense Appropriations Conference Report, (the “2005 DOD Grant”), which included $926,000 for the development of protein hydrogel technology for use on the battlefield. The Company applied for and was awarded the full $926,000 allocated under the 2005 DOD Grant in connection with its development of BioFoam®. The Company has received advances totaling $926,000 under this grant during 2005 and 2006, and began recognizing revenues for expenses incurred related to this grant during the fourth quarter of 2005. The Company is currently involved in the initial BioFoam animal trial funded by this grant revenue.

The U.S. Congress 2006 Defense Appropriations Conference Report included approximately $2.3 million for the continued development of protein hydrogel technology for use on the battlefield. CryoLife applied for funding for BioFoam development under this bill in July 2006, but has not yet received notice of any award decision. The 2007 Defense Appropriations Conference Report included approximately $1.0 million for the continued development of protein hydrogel technology for use on the battlefield. CryoLife anticipates applying for funding under this bill during 2007.

The Company anticipates that other revenues in 2007 will increase over 2006 due to continuing recognition of the Company’s licensing revenues during 2007 and an anticipated increase in grant revenues related to spending on BioFoam research.

Costs and Expenses

Cost of Products

Cost of products was $1.9 million for both the three months ended December 31, 2006 and 2005, representing 18% and 20%, respectively, of total product revenues during such periods. Cost of products was $7.5 million and $8.1 million for the twelve months ended December 31, 2006 and 2005, respectively, representing 18% and 21%, respectively, of total product revenues during such periods.

The cost of products decreased for the twelve months ended December 31, 2006 and the cost of products as a percentage of total product revenues decreased for the three and twelve months ended December 31, 2006, primarily due to improvements in BioGlue margins from period to period. These margin improvements were a result of improvements in BioGlue average selling prices due to the price increases which went into effect in January and July 2006 and greater manufacturing throughput, which reduced the per unit cost to produce BioGlue. Cost of products for the three months ended December 31, 2006 was flat compared to the three months ended December 31, 2005 as the lower per unit cost to produce BioGlue was offset by increases in BioGlue sales volume.

The Company anticipates that in 2007 cost of products will increase to reflect volume increases.

Cost of Human Tissue Preservation Services

Cost of human tissue preservation services was $9.2 million and $6.4 million for the three months ended December 31, 2006 and 2005, respectively, representing 90% and 79%, respectively, of total tissue preservation service revenues during

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such periods. Cost of human tissue preservation services for the three months ended December 31, 2006 includes the write-down of $2.8 million due to the impairment of certain orthopaedic tissues and processing materials as a result of the RTI Agreement discussed above and the write-down of $140,000 of certain deferred preservation costs that exceeded market value. Cost of human tissue preservation services for the three months ended December 31, 2005 includes the write-down of $499,000 of certain deferred preservation costs that exceeded market value.

Cost of human tissue preservation services was $30.0 million and $24.4 million for the twelve months ended December 31, 2006 and 2005, respectively, representing 75% and 80%, respectively, of total tissue preservation service revenues during such periods. Cost of human tissue preservation services for the twelve months ended December 31, 2006 includes the write-down of $2.8 million due to the impairment of certain orthopaedic tissues and processing materials as a result of the RTI Agreement discussed above, the write-down of $1.2 million of certain deferred preservation costs that exceeded market value, and the write-down of $588,000 due to the impairment of certain orthopaedic tissues. Cost of human tissue preservation services for the twelve months ended December 31, 2005 includes the write-down of $1.8 million of certain deferred preservation costs that exceeded market value.

The write-down of deferred tissue preservation costs as a result of the RTI Agreement during 2006 is based on an estimate of the tissues that will be shipped during the 18-month period subsequent to December 31, 2006 in which the Company can continue to distribute its existing orthopaedic tissues. The amount of tissues shipped during that period could differ significantly from this initial estimate resulting in higher margins on shipments of orthopaedic tissues during the 18-month period or additional write-downs in future periods. See Item 8, “Note 3 of the Notes to Consolidated Financial Statements” for further discussion of the RTI Agreement and its financial impact.

The write-down of deferred tissue preservation costs that exceeded market value in both years was primarily related to the Company’s non-valved cardiac tissues. The Company implemented a fee increase effective July 1, 2006, in part to address these tissues, which have had costs in excess of the average service fees. The decrease of the write-down in the current year periods as compared to the prior year periods is primarily due to the effect of this fee increase on the Company’s average service fees for the affected tissue types.

The write-down due to the impairment of certain orthopaedic tissues during the twelve months ended December 31, 2006 is the result of excess tissue inventory levels above those expected to ship before the expiration date of the tissue’s packaging.

After considering the effects of the write-downs discussed above, the remaining increase in cost of human tissue preservation services for the three and twelve months ended December 30, 2006 is primarily due to increased tissue preservation service volume as compared to the same period in 2005. After considering the effects of the write-downs discussed above, cost of human tissue preservation services as a percentage of total tissue preservation service revenues decreased. The decrease is primarily due to improvements in tissue preservation margins as a result of improvements in the Company’s tissue processing yields, an increase in average service fees due to fee increases implemented in 2006, and to a lesser extent an increase in the amount of tissues processed.

The Company anticipates that aggregate cost of human tissue preservation services in 2007 will be similar to 2006. The Company anticipates that cost of human tissue preservation services as a percentage of tissue preservation service revenues will decrease in 2007 as compared to 2006 as a result of a mix shift as the percentage of shipments of lower margin orthopaedic tissues decrease and shipments of cardiovascular and vascular tissues increase. Cardiovascular and vascular tissue shipments are expected to increase during 2007 as a result of anticipated increases in procurement. The Company expects that procurement of cardiovascular and vascular tissues during 2007 will be favorably impacted by the RTI Agreement discussed in Recent Events above.

General, Administrative, and Marketing Expenses

General, administrative, and marketing expenses increased 9% to $11.4 million for the three months ended December 31, 2006, compared to $10.5 million for the three months ended December 31, 2005, representing 54% and 58%, respectively, of total revenues during such periods. General, administrative, and marketing expenses for the three months ended December 31, 2006 includes an unfavorable charge of $751,000 for stock-based compensation expenses and a favorable adjustment of $333,000 for the adjustment of reserves for product liability losses. General, administrative, and marketing expenses for the three months ended December 31, 2005 includes a favorable adjustment to legal and settlement accruals of $683,000, an accrual of $150,000 for post employment benefits related to the signing of a compensation agreement by one of the Company’s senior executives, and a $118,000 charge for stock-based compensation. After considering the effect of these items, general, administrative, and marketing expenses for the three months ended December 31, 2006 increased slightly, primarily due to an increase in executive bonus accruals, partially offset by a decrease in legal and professional fees.

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General, administrative, and marketing expenses decreased 22% to $41.5 million for the twelve months ended December 31, 2006, compared to $53.2 million for the twelve months ended December 31, 2005, representing 51% and 77%, respectively, of total revenues during such periods. General, administrative, and marketing expenses for the twelve months ended December 31, 2006 includes a favorable adjustment of $2.1 million related to the settlement of insurance coverage disputes with former insurance carriers, net of associated legal fees, an unfavorable charge of $1.5 million for stock-based compensation expenses, a favorable adjustment of $784,000 for the adjustment of reserves for product liability losses, and an accrual of $448,000 for post employment benefits. General, administrative, and marketing expenses for the twelve months ended December 31, 2005 includes an accrual of $11.6 million in expense related to the settlement of the shareholder class action lawsuit and related legal fees, a favorable adjustment of $961,000 for the adjustment of reserves for product liability losses, an accrual of $851,000 for post employment benefits, and $285,000 charge for stock-based compensation. After considering the effect of these items, general, administrative, and marketing expenses for the twelve months ended December 31, 2006 increased, primarily due to an increase in marketing commissions to support revenue growth and an increase in executive bonus accruals, partially offset by a decrease in decrease in legal and professional fees.

The Company anticipates that general, administrative, and marketing expenses will increase in 2007 when compared to 2006, due to the expected increases in marketing expenses and in personnel related expenses to support expected revenue growth and personnel increases, although several important components are difficult to estimate or control. For example the Company will continue to evaluate the level of accruals for product liability claims and make adjustments as required based on periodic actuarial analyses and product liability claim status. Adjustments to these accruals may be required during 2007, and the effect of these adjustments may be favorable or unfavorable to general, administrative, and marketing expenses.

Gain on Exit Activities

Gain on exit activities was $2.6 million for the three and twelve months ended December 31, 2006, compared to zero for the three and twelve months ended December 31, 2005. This represents the gain associated with the RTI Agreement entered into in December 2006 and discussed in the Recent Events section above. The gain is primarily due to a gain on the recording of intangible assets received from RTI, partially offset by several individually immaterial asset write-downs and expense accruals incurred as a result of the transaction. The intangibles acquired from RTI in the transaction include procurement contracts and access to the procurement of cardiovascular and vascular human tissues previously received by RTI, customer lists, and a non-compete agreement. This gain is offset by losses due to the impairment of certain orthopaedic tissues and processing materials resulting from the RTI Agreement which have been recorded as part of cost of human tissue preservation services as discussed in that section above. The gain on exit activities and the write-down in cost of human tissue preservation services net to an overall loss of $159,000 related to the transaction. See Item 8, “Note 3 of the Notes to Consolidated Financial Statements” for further discussion of the RTI Agreement and its financial impact.

Research and Development Expenses

Research and development expenses were $975,000 for the three months ended December 31, 2006, compared to $980,000 for the three months ended December 31, 2005, representing 5% and 6%, respectively, of total revenues during each such period. Research and development expenses were $3.5 million for the twelve months ended December 31, 2006, compared to $3.7 million for the twelve months ended December 31, 2005, representing 4% and 5%, respectively, of total revenues during each such period. The decrease in research and development expenses in both the three and twelve month periods ended December 31, 2006 was due to timing delays for planned external research studies. Research and development spending in 2006 and 2005 was primarily focused on the Company’s tissue preservation, SynerGraft, which includes allograft and xenograft heart valves, vascular grafts, and ProPatch Soft Tissue Repair Matrix, and Protein Hydrogel Technologies (“PHT”), which include BioGlue, BioFoam, BioDisc, and related products.

The Company anticipates that research and development expenses will increase in 2007 when compared to 2006, primarily due to increased spending on research related to PHT, particularly BioFoam and BioDisc, as well as continuing spending on research related to SynerGraft products and tissues, and human tissue preservation. The BioFoam spending increase is expected to be due in part to funds the Company has obtained or expects to obtain pursuant to the 2005 and 2006 Defense Appropriation Conference Report discussed in “Revenues—Other Revenues” above.

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Other Costs and Expenses

Interest expense increased to $153,000 for the three months ended December 31, 2006, compared to $126,000 for the three months ended December 31, 2005. Interest expense increased to $657,000 for the twelve months ended December 31, 2006, compared to $346,000 for the twelve months ended December 31, 2005. The increase in interest expense for the three and twelve months ended December 31, 2006 is primarily due to higher borrowings under the Company’s February 2005 credit agreement with Wells Fargo Foothill, Inc. (the “Credit Agreement”) as compared to the same period in 2005 and higher interest rates on these borrowings, as the bank’s prime lending rate has increased since the prior year period. Interest expense for the three and twelve months ended December 31, 2006 and 2005 included interest incurred related to the Credit Agreement, notes payable, and capital leases.

Interest income decreased to $105,000 for the three months ended December 31, 2006, compared to $123,000 for the three months ended December 31, 2005. Interest income decreased to $409,000 for the twelve months ended December 31, 2006, compared to $531,000 for the twelve months ended December 31, 2005. Interest income for the three and twelve months ended December 31, 2006 and 2005 was primarily due to interest earned on the Company’s cash, cash equivalents, and marketable securities.

The change in valuation of the Derivative was an expense of $10,000 for the three months ended December 31, 2006 as compared to income of $512,000 for the three months ended December 31, 2005. The change in valuation of the Derivative was an expense of $121,000 for the twelve months ended December 31, 2006 as compared to income of $140,000 for the twelve months ended December 31, 2005. The valuation of the Derivative in these periods was a function of several variables including the price and expected volatility of the Company’s common stock, the number of shares of Preferred Stock outstanding, and the general level of U.S. interest rates. The change in valuation of the Derivative in the three and twelve months ended December 31, 2005 also includes the amount of the Dividend Make-Whole Payment on preferred shares converted during the period.

The Company is unable to estimate the change in valuation of the Derivative for 2007, as this amount is subject to numerous variables including the market value of the Company’s common stock, the number of preferred stock shares converted during 2007, and the general level of U.S. interest rates. The change in valuation of the Derivative in 2007 could significantly differ from the levels experienced in 2006.

The Company’s income tax expense was $148,000 and $285,000 for the three and twelve months ended December 31, 2006, respectively. The Company’s income tax expense of for the three months ended December 31, 2006 was primarily due to alternative minimum tax on the Company’s taxable income for 2006 that cannot be offset by the Company’s net operating loss carryforwards, and foreign taxes on income of the Company’s wholly owned European subsidiary. The Company’s income tax expense of for the twelve months ended December 31, 2006 was primarily due to the recording of deferred tax liabilities related to a foreign jurisdiction and alternative minimum tax on the Company’s taxable income for 2006 that cannot be offset by the Company’s net operating loss carryforwards, partially offset by the favorable effect of adjustments to certain state tax obligations and the favorable effect of reductions in the estimated foreign taxes on income of the Company’s wholly owned European subsidiary.

The Company’s income tax benefit of $618,000 and $428,000 for the three and twelve months ended December 31, 2005, respectively, was primarily related to foreign taxes on income of the Company’s wholly owned European subsidiary.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Revenues

   

Three Months Ended

December 31,

  

Twelve Months Ended

December 31,

   2005  2004  2005  2004

Revenues

  $17,961  $15,866  $69,282  $62,384

Revenues increased 13% for the three months ended December 31, 2005 as compared to the three months ended December 31, 2004. This increase was primarily due to an increase in sales of BioGlue and an increase in preservation service revenues for each of the Company’s three major tissue types as compared to the prior year period.

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Revenues increased 11% for the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004. This increase was primarily due to an increase in sales of BioGlue and an increase in preservation service revenues for each of the Company’s three major tissue types as compared to the prior year.

A detailed discussion of the change in BioGlue revenues and in preservation service revenues for each of the three major tissue types processed by the Company is presented below.

BioGlue

   

Three Months Ended

December 31,

  

Twelve Months Ended

December 31,

 
   
   2005  2004  2005  2004 

Revenues

  $9,645  $9,226  $37,985  $35,745 

BioGlue revenues as a percentage of total revenue

   54%  58%  55%  57%

Revenues from the sale of BioGlue increased 5% for the three months ended December 31, 2005 as compared to the three months ended December 31, 2004. BioGlue revenues for the three months ended December 31, 2005 included an increase in average selling prices, which increased revenues by 7%, partially offset by a decrease in BioGlue sales volume, which decreased revenues by 1% and the effect of foreign currency exchange, which decreased revenues by 1%.

Revenues from the sale of BioGlue increased 6% for the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004. The 6% increase in revenues for the twelve months ended December 31, 2005 was due to an increase in average selling prices, which increased revenues.

The increase in average selling prices for the quarter and year to date periods was primarily due to list price increases that went into effect on January 1, 2005 domestically. BioGlue volume for the three months ended December 31, 2005 was negatively impacted by the success of the BioGlue syringe product, which does not utilize a separate delivery device or require the purchase of separate applicator tips (a variety of optional applicator tips are available for the BioGlue syringe). Primarily as a result of these lost accessory sales, BioGlue volume decreased slightly for the three months ended December 31, 2005 compared to the three months ended December 31, 2004, despite an increase in the milliliters of BioGlue sold during that the same period. Domestic revenues accounted for 76% of total BioGlue revenues in 2005 and 78% of total BioGlue revenues in 2004.

Cardiovascular Preservation Services

   

Three Months Ended

December 31,

  

Twelve Months Ended

December 31,

 
   
   2005  2004  2005  2004 

Revenues

  $3,355  $2,767  $13,762  $12,504 

Cardiovascular revenues as a percentage of total revenue

   19%  17%  20%  20%

Revenues from cardiovascular preservation services increased 21% for the three months ended December 31, 2005 as compared to the three months ended December 31, 2004. The 21% increase in revenues for the three months ended December 31, 2005 was due to an increase in average service fees, which increased revenues by 14%, and an increase in cardiovascular volume, which increased revenues by 7%.

Revenues from cardiovascular preservation services increased 10% for the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004. The 10% increase in revenues for the twelve months ended December 31, 2005 was due to an increase in average service fees, which increased revenues by 20%, partially offset by a decrease in cardiovascular volume, which reduced revenues by 10%.

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The increase in average service fees reflected the fee increases that went into effect in July 2004 and January 2005. The fee increases primarily increased revenues for traditionally processed pulmonary valves and aortic valves. The increase in cardiovascular volume for the three month period ended December 31, 2005 was primarily due to increases in aortic valve shipments and to a lesser extent shipments of non-valved conduits and patch material due in part to improved cardiac procurement in the latter part of 2005. The decrease in cardiovascular volume for the twelve months ended December 31, 2005 was largely due to a reduced level of pulmonary valve shipments, primarily due to the reduced amount of tissues available for implantation as a result of a decline in procurement levels, particularly in the first half of 2005. See the additional discussion of procurement below.

The Company’s procurement of cardiac tissues, from which heart valves and non-valved cardiac tissues are processed, increased 10% during second half of 2005 as compared to the first six months of 2005. The Company’s procurement of cardiac tissues decreased 11% for the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004.

Vascular Preservation Services

   

Three Months Ended

December 31,

  

Twelve Months Ended

December 31,

 
   
   2005  2004  2005  2004 

Revenues

  $3,172  $2,522  $11,453  $10,293 

Vascular revenues as a percentage of total revenue

   18%  16%  17%  16%

Revenues from vascular preservation services increased 26% for the three months ended December 31, 2005 as compared to the three months ended December 31, 2004. The 26% increase in revenues for the three months ended December 31, 2005 was due to an increase in average service fees, which increased revenues by 16% and an increase in vascular volume, which increased revenues by 10%.

Revenues from vascular preservation services increased 11% for the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004. The 11% increase in revenues for the twelve months ended December 31, 2005 was due to an increase in average service fees, which increased revenues by 20%, partially offset by a decrease in vascular volume, which reduced revenues by 9%.

The increase in average service fees reflected the fee increases that went into effect in July 2004 and January 2005 on all vascular tissues. The increase in vascular volume for the three months ended December 31, 2005 is primarily due to increases in shipments of saphenous veins, due in part to improved vascular procurement in the second half of 2005. The decrease in vascular volume for the twelve months ended December 31, 2005 is primarily due to decreases in shipments of saphenous veins, due in part to a decline in procurement levels in the fourth quarter of 2004 and the first quarter of 2005, which had a negative impact on vascular revenues for the year ended December 31, 2005. See the additional discussion of procurement below.

The Company’s procurement of vascular tissues increased 41% during the second half of 2005 as compared to the first six months of 2005. The Company’s procurement of vascular tissues increased 9% for the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004.

Orthopaedic Preservation Services

   

Three Months Ended

December 31,

  

Twelve Months Ended

December 31,

 
   
   2005  2004  2005  2004 

Revenues

  $1,561  $1,153  $5,092  $2,879 

Orthopaedic revenues as a percentage of total revenue

   9%  7%  7%  5%

Revenues from orthopaedic preservation services increased 35% for the three months ended December 31, 2005 as compared to the three months ended December 31, 2004. The 35% increase in revenues for the three months ended December 31, 2005 was largely due to an increase in orthopaedic volume, which increased revenues by 37%.

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Revenues from orthopaedic preservation services increased 77% for the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004. The 77% increase in revenues for the twelve months ended December 31, 2005 was due to an increase in orthopaedic volume, which increased revenues by 77%.

The volume increase was primarily due to an increase in shipments of osteochondral grafts and non-boned tendons for the three and twelve months ended December 31, 2005. The increase in orthopaedic tissue shipments was directly related to an increase in demand for the Company’s orthopaedic tissues through the introduction of the new cryopreserved osteochondral graft in the first quarter of 2005, the reestablishment of the Company’s presence in the orthopaedic tissue business, and the rebuilding of the Company’s supply of tissues available for shipment. To a lesser degree, the Company’s orthopaedic tissue business was favorably impacted in 2005 by the introduction of tissues terminally sterilized with gamma irradiation.

The Company’s procurement of orthopaedic tissues increased 30% during the second half of 2005 as compared to the first six months of 2005. The Company’s procurement of orthopaedic tissues decreased 25% for the twelve months ended December 31, 2005 as compared to the twelve months ended December 31, 2004.

Grant Revenues

Grant revenues were $43,000 and zero, respectively, for the three months ended December 31, 2005 and 2004. Grant revenues were $43,000 and $71,000, respectively, for the twelve months ended December 31, 2005 and 2004.

Grant revenues in 2005 are related to funding received under the 2005 DOD Grant, which included $926,000 for the development of protein hydrogel technology for use on the battlefield. The Company applied for and was awarded the full $926,000 allocated under the 2005 DOD Grant in connection with its development of BioFoam. The Company began receiving advances under the grant during the second half of 2005, and was involved in the initial animal trial with the U.S. Army’s Institute for Surgical Research. As a result the Company began recognizing revenues for expenses incurred related to this grant during the fourth quarter of 2005.

Costs and Expenses

Cost of Products

Cost of products was $1.9 million for the three months ended December 31, 2005 as compared to $2.0 million for the three months ended December 31, 2004, representing 20% and 21%, respectively, of total product revenues during such periods. Cost of products was $8.1 million for the twelve months ended December 31, 2005 as compared to $7.8 million for the twelve months ended December 31, 2004, representing 21% of total product revenues during each such period. Cost of products as a percentage of total product revenues remained at consistent levels from period-to-period.

Cost of Human Tissue Preservation Services

Cost of human tissue preservation services was $6.4 million for the three months ended December 31, 2005 as compared to $6.0 million for the three months ended December 31, 2004, representing 79% and 94%, respectively, of total tissue preservation service revenues during such periods. Cost of human tissue preservation services for the three months ended December 31, 2005 and 2004 includes the write-down of $499,000 and $511,000, respectively, of certain deferred preservation costs that exceeded market value.

Cost of human tissue preservation services was $24.4 million for the twelve months ended December 31, 2005 as compared to $29.8 million for the twelve months ended December 31, 2004, representing 80% and 116%, respectively, of total tissue preservation service revenues during such periods. Cost of human tissue preservation services for the twelve months ended December 31, 2005 and 2004 includes the write-down of $1.8 million and $6.6 million, respectively, reflecting current period processing costs that exceeded market value based on recent average service fees. The twelve months ended December 31, 2004 also included $353,000 in costs related to the write-down of SynerGraft processed tissues.

The write-down of deferred tissue preservation costs in both the three and twelve months ended December 31, 2005 and 2004 is primarily due to higher overhead cost allocations per unit associated with lower tissue processing volumes and

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changes in processing methods subsequent to the FDA Order, resulting in costs which exceed market value for certain tissues. The decrease in cost of human tissue preservation services for the twelve month period ended December 31, 2005 and the decrease in cost of human tissue preservation services as a percentage of tissue preservation service revenues for the three and twelve month period ended December 31, 2005 is primarily due to improvements in the Company’s tissue processing yields and, to a lesser extent, an increase in the number of tissues processed. Cost of human tissue preservation services as a percentage of tissue preservation service revenues was favorably affected by shipments of tissue with a zero cost basis for which revenues were recognized but costs, estimated to be $549,000 for the twelve months ended December 31, 2004, had already been recorded in previous periods primarily related to write-downs of deferred preservation costs in 2002. The write-downs of deferred preservation costs during 2002 created a new cost basis, which cannot be written back up when these tissues are shipped or become available for shipment.

General, Administrative, and Marketing Expenses

General, administrative, and marketing expenses decreased 2% to $10.5 million for the three months ended December 31, 2005, compared to $10.7 million for the three months ended December 31, 2004, representing 59% and 67%, respectively, of total revenues during such periods. General, administrative, and marketing expenses for the three months ended December 31, 2005 includes a favorable adjustment to legal and settlement accruals of $683,000 and unfavorable adjustments/expenses of approximately $89,000 related to the expensing of stock options in accordance with the provisions of SFAS 123R and $150,000 to accrue post employment benefits related to the signing of a compensation agreement by one of the Company’s senior executives. Excluding these items, general, administrative, and marketing expenses decreased due to a decrease in insurance costs, largely offset by increases in marketing fees primarily due to increased marketing expenses to support revenue growth including increased commissions and expenses related to tradeshows.

General, administrative, and marketing expenses increased 25% to $53.2 million for the twelve months ended December 31, 2005, compared to $42.6 million for the twelve months ended December 31, 2004, representing 77% and 68%, respectively, of total revenues during such periods. General, administrative, and marketing expenses for the twelve months ended December 31, 2005 includes an accrual of $11.6 million in expense related to the settlement of the shareholder class action lawsuit and related legal fees as discussed in Item 8, “Note 10 of the Notes to Consolidated Financial Statements,” and approximately $851,000 in post employment benefits related to the signing of a compensation agreement by one of the Company’s senior executives, partially offset by a reversal of approximately $961,000 in previously accrued legal expenses and settlement accruals. General, administrative, and marketing expenses for the twelve months ended December 31, 2004 includes an accrual of approximately $1.5 million in additional legal expenses and settlement accruals. Excluding these items, general, administrative, and marketing expenses decreased due to lower professional fees and $269,000 in lower insurance costs in 2005 as compared to 2004, largely offset by increases in marketing fees primarily due to increased marketing expenses to support revenue growth including increased commissions.

Research and Development Expenses

Research and development expenses were $980,000 for the three months ended December 31, 2005, compared to $1.2 million for the three months ended December 31, 2004, representing 6% and 8%, respectively, of total revenues during such periods. Research and development expenses were $3.7 million for the twelve months ended December 31, 2005 compared to $3.9 million for the twelve months ended December 31, 2004, representing 5% and 6%, respectively, of total revenues during such periods. Research and development spending in 2005 and 2004 was primarily focused on the Company’s tissue preservation, SynerGraft, and Protein Hydrogel Technologies, which include BioGlue and related products.

Other Costs and Expenses

Interest expense increased to $126,000 for the three months ended December 31, 2005, compared to $40,000 for the three months ended December 31, 2004. Interest expense increased to $346,000 for the twelve months ended December 31, 2005, compared to $196,000 for the twelve months ended December 31, 2004. Interest expense for the three and twelve months ended December 31, 2005 included interest incurred related to the Credit Agreement, short term notes payable, and capital leases. Interest expense for the three and twelve months ended December 31, 2004 included interest incurred related to the Company’s short term notes payable and capital leases.

Interest income increased to $123,000 for the three months ended December 31, 2005, compared to $61,000 for the three months ended December 31, 2004. Interest income increased to $531,000 for the twelve months ended December 31, 2005, compared to $262,000 for the twelve months ended December 31, 2004. Interest income in both periods was primarily due to interest earned on the Company’s cash, cash equivalents, and marketable securities.

59


The change in valuation of the derivative was income of $512,000 for the three months ended December 31, 2005 and $140,000 for the twelve months ended December 31, 2005. The change in valuation of derivative in the three and twelve months ended December 31, 2005 reflects the amount of the Dividend Make-Whole Payment on preferred shares converted during the period and the amount of the change in valuation of the derivative. The change in valuation of the derivative was zero for the three and twelve months ended December 31, 2004, as the Derivative was first established in March 2005.

Seasonality

The demand for BioGlue appears to experience seasonality, with a flattening or slight decline in demand generally occurring in the third quarter followed by stronger demand in the fourth quarter. Management believes that this trend for BioGlue may be due to fewer surgeries being performed on adult patients in the summer months. The Company will continue to evaluate the seasonal nature of BioGlue sales.

The demand for the Company’s cardiovascular tissue preservation services has historically been seasonal, with peak demand generally occurring in the second and third quarters. Management believes this trend for cardiovascular tissue preservation services is primarily due to the high number of surgeries scheduled during the summer months for school aged patients, who drive the demand for a large percentage of CryoLife’s cardiovascular tissues. This seasonal trend has been obscured in recent years by the impact of the FDA Order and related events. The Company expects that this seasonal trend will be apparent in future years.

The demand for the Company’s human vascular and orthopaedic tissue preservation services and bioprosthetic cardiovascular and vascular devices does not appear to experience seasonal trends.

Liquidity and Capital Resources

Net Working Capital

At December 31, 2006 net working capital (current assets of $49.4 million less current liabilities of $22.9 million) was $26.5 million, with a current ratio (current assets divided by current liabilities) of 2 to 1, compared to net working capital of $23.9 million, with a current ratio of 2 to 1 at December 31, 2005.

The Company’s primary capital requirements for the twelve months ended December 31, 2006 arose out of general working capital needs, capital expenditures for facilities and equipment, and funding of research and development projects. In recent years the Company’s operating activities have failed to generate sufficient cash to fund its business due to the increasing costs of operations, primarily costs related to the Company’s tissue preservation services business, increases in general, administrative, and marketing costs over pre-FDA Order levels, and increased legal, professional, and litigation expenses. For the twelve months ended December 31, 2006 the Company funded its operating cash requirements primarily through existing cash, cash equivalents, and marketable securities, and through bank credit facilities.

Overall Liquidity and Capital Resources

The Company believes that the Company’s existing cash, cash equivalents, marketable securities, and availability under the Credit Agreement will enable the Company to meet its liquidity needs through at least December 31, 2007.

The Company could experience an adverse impact on revenues and cash flows during 2007 from decreases in orthopaedic revenue as a result of the RTI Agreement, which will need to be offset by increases in cardiovascular and vascular revenues derived as a result of the RTI Agreement.

The Company believes the following should continue to have a favorable impact on cash flow from operations during 2007, although there can be no assurance that these events will occur as and when currently anticipated:

60


Expected increases in BioGlue revenues over levels experienced in 2006 due to increases in BioGlue list prices implemented in July 2006 and January 2007 and anticipated volume increases,

Expected increases in total preservation service revenues over levels experienced in 2006 due to fee increases for certain tissues implemented in July 2006 and January 2007, to reflect the higher cost of processing these tissues, and anticipated volume increases for cardiovascular and vascular tissues,

Anticipated net benefits of the RTI Agreement in reducing general, administrative, and marketing costs related to orthopaedic tissues, and

Anticipated decreases in cash payments related to the defense and resolution of lawsuits and claims from the levels seen in 2003 through 2006.

However, the Company’s long term liquidity and capital requirements will depend upon numerous factors, including:

The success of BioGlue and other products using related technology,

The Company’s ability to increase the level of tissue procurement and demand for its tissue preservation services,

The Company’s ability to maintain sufficient margins on its tissue preservation services,

The Company’s spending levels on its research and development activities, including research studies, to develop and support its service and product pipeline,

The timing and cost of resolving product liability lawsuits and other claims (as discussed in Item 8, “Note 10 of the Notes to Consolidated Financial Statements”),

The successful transition of cardiovascular and vascular tissue procurement previously received by RTI to the Company (as discussed in Item 8, “Note 3 of the Notes to Consolidated Financial Statements”),

To a lesser degree, the Company’s success at resolving the issues with the FDA regarding processing of human tissue using the SynerGraft technology (as discussed in Item 8, “Note 2 of the Notes to Consolidated Financial Statements”), and

The Company’s success in implementing its recently identified strategic initiatives.

If the Company is unable to address these issues and continues to experience negative operating cash flows, the Company anticipates that it may require additional financing or seek to raise additional funds through bank facilities, debt or equity offerings, or other sources of capital to meet liquidity and capital requirements beyond December 31, 2007. Additional funds may not be available when needed or on terms acceptable to the Company, which could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.

On February 8, 2005 CryoLife and its subsidiaries entered into a credit agreement with Wells Fargo Foothill, Inc. as lender (the “Credit Agreement”) to address some of its liquidity needs. As of December 31, 2006 the outstanding balance of the Credit Agreement was $4.5 million and the remaining borrowing availability was $10.5 million. The Company’s borrowing availability is subject to various limitations as discussed in Item 8, “Note 6 of the Notes to Consolidated Financial Statements” that may restrict future borrowings.

In January 2006 the Company engaged Piper Jaffray & Co. to assist the Company’s management and Board of Directors in identifying and evaluating potential strategies to enhance shareholder value. In November 2006 the Company announced that as a result of this review, the Board of Directors has directed management to actively pursue three key strategies in addition to continuing to focus on growing its business and leveraging its strengths and expertise in its core marketplaces. These three strategies are designed to generate revenue and earnings growth: identify and evaluate acquisition opportunities of complementary product lines and companies; license Company technology to third parties for non-competing uses; and analyze and identify underperforming assets for potential sale or disposal. Management’s actions related to this Board directive are ongoing.

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Product Liability Claims

As discussed in Item 8, “Note 10 of the Notes to Consolidated Financial Statements”, as of December 31, 2006 the Company had accrued a total of $330,000 for pending product liability lawsuits. The $330,000 accrual is an estimate of the Company’s portion of the costs required to resolve one of three outstanding claims, and does not reflect actual settlement arrangements or actual judgments for all open claims, including punitive damages, which may be assessed by the courts. The $330,000 accrual is not a cash reserve. The timing and amount of actual future payments is dependent on when and if judgments are rendered, and/or settlements are reached. Should payments related to the accrual be required, the Company’s portion of these monies would have to be paid from liquid assets. The Company continues to attempt to reach resolution of these outstanding claims in order to minimize the potential cash payout.

If the Company is unable to settle the outstanding claims for amounts within its ability to pay or one or more of the product liability claims in which the Company is a defendant should be tried with a substantial verdict rendered in favor of the plaintiff(s), there can be no assurance that such verdict(s) would not exceed the Company’s available liquid assets. Failure by the Company to meet required future cash payments to resolve the outstanding product liability claims would have a material adverse effect on the financial position, results of operations, and cash flows of the Company.

As discussed in Item 8, “Note 10 of the Notes to Consolidated Financial Statements,” at December 31, 2006 the Company had accrued a total $6.6 million for the estimated costs of unreported product liability claims related to services performed and products sold prior to December 31, 2006 and had recorded a receivable of $2.3 million representing amounts to be paid by the Company’s insurance carriers. Further analysis indicated that the liability could be estimated to be as high as $12.3 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques. The $6.6 million accrual does not represent cash set aside. The timing of future payments related to the accrual is dependent on when and if claims are asserted, judgments are rendered, and/or settlements are reached. Should payments related to the accrual be required, these monies would have to be paid from insurance proceeds and liquid assets. Since the amount accrued is based on actuarial estimates, actual amounts required could vary significantly from this estimate.

Net Cash from Operating Activities

Net cash used in operating activities was $1.1 million for the twelve months ended December 31, 2006 as compared to $18.5 million for the twelve months ended December 31, 2005. The $1.1 million in current year cash used was primarily due to the Company’s working capital needs, as reflected in the increases in deferred preservation costs, inventory, and accounts receivable on the Company’s Consolidated Balance Sheet.

The Company uses the indirect method to prepare its cash flow statement, and as such the operating cash flows are based on the Company’s net income, which is then adjusted to remove non-cash items included that generated a book gain or loss during the period and for changes in operating assets and liabilities. For the twelve months ended December 31, 2006 the Company’s $365,000 net income included significant non-cash items that generated favorable and unfavorable adjustments to net income. These adjustments included a favorable $4.8 million in depreciation and amortization, a favorable $1.8 million in write-downs for impairment of deferred preservation costs, a favorable $1.6 million in non-cash compensation, primarily related to the SFAS 123R expense for new and existing stock options and stock awards to the Company’s board of directors and certain employees, and a favorable $426,000 for the loss on disposal of assets. The Company’s working capital needs, or changes in operating assets and liabilities, also affected cash from operations. For the twelve months ended December 31, 2006 these changes included an unfavorable $10.4 million due to the buildup of deferred preservation costs and inventories, an unfavorable $2.4 million due to the timing differences between the recording of receivables and the actual receipt of cash, and a favorable $1.9 million due to the timing differences between the recording of accounts payable and other accruals and the actual payment of cash.

Net Cash from Investing Activities

Net cash used by investing activities was $557,000 for the twelve months ended December 31, 2006, as compared to $2.0 million for the twelve months ended December 31, 2005. The $557,000 in current year cash used was primarily due to $17.4 million in purchases of marketable securities and $1.6 million in capital expenditures, partially offset by $18.6 million in proceeds from sales and maturities of marketable securities.

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Net Cash from Financing Activities

Net cash used by financing activities was $968,000 for the twelve months ended December 31, 2006, as compared to $22.7 million in cash provided for the twelve months ended December 31, 2005. The $968,000 in current year cash used was primarily due to $2.3 million in principal payments on notes payable, $973,000 in payments of Preferred Stock dividends, $570,000 in principal payments on capital leases, and $553,000 in debt principal payments. These unfavorable effects were partially offset by $2.3 million in proceeds from the financing of insurance policies, $710,000 in proceeds from issuance of debt, including borrowing on the Company’s line of credit and issuance of new capital leases, and $468,000 in proceeds from exercises of options and issuance of stock.

Scheduled Contractual Obligations and Future Payments

Scheduled contractual obligations and the related future payments are as follows (in thousands):

   Total  2007  2008  2009  2010  2011  Thereafter

Operating leases

  $19,833  $2,459  $2,360  $2,226  $2,119  $2,145  $8,524

Revolving line of credit

   4,507   —     4,507   —     —     —     —  

Capital lease obligations

   193   53   52   53   35   —     —  

Purchase commitments

   255   254   1   —     —     —     —  

Other obligations

   1,239   992   192   55   —     —     —  
                            

Total contractual obligations

  $26,027  $3,758  $7,112  $2,334  $2,154  $2,145  $8,524

The Company’s operating lease obligations result from the lease of land and buildings that comprise the Company’s corporate headquarters and manufacturing facilities, leases related to additional office and warehouse space rented by the Company, leases on Company vehicles, leases on housing for expatriates, and leases on a variety of office equipment.

The line of credit obligation results from the Company’s borrowing of funds under its Credit Agreement. The timing of the obligation in the above table is based on the February 7, 2008 Credit Agreement expiration date, at which time the outstanding principal balance will be due. Due to the terms of the Credit Agreement, and due to the net losses and negative cash flows experienced by the Company since the FDA Order, the Company has classified amounts due under the Credit Agreement as short-term debt on the December 31, 2006 Consolidated Balance Sheet in accordance with the provisions of FASB Technical Bulletin No. 79-3 (As Amended). Assuming the Company’s level of borrowings and the interest rate on the line of credit remain the same, the Company would have additional contractual obligations for interest expense and fees of $486,000, and $56,000 for 2007 and 2008, respectively, which are not Amounts included in the table above.

The Company’s capital lease obligations result from the financing of certain of the Company’s equipment.

The Company’s purchase commitments generally result from agreements with suppliers to stock certain custom raw materials needed for the Company’s processingtables are estimates and production.

The Company’s other obligations contain various items including minimum required royalty payments, payments to support research and development activities, and other items as appropriate.

Preferred Stock

Dividends on the Company’s Preferred Stock are cumulative from the date of original issue at the annual rate of 6% of the liquidation preference of the Preferred Stock, payable quarterly on the first day of January, April, July, and October, commencing July 1, 2005. Any dividends must be declared by the Company’s board of directors and must come from funds that are legally available for dividend payments. Dividends of approximately $243,000 were paid on January 2, 2007 to shareholders of record on December 22, 2006.

Stock Repurchases

In the first quarter of 2006 the Company’s Board of Directors authorized the purchase of shares of its common stock from employees to fund the payment of employee federal and state withholding taxes in association with the grant of stock to employees in February 2006. These repurchases of stock from employees totaled $50,000. No further purchases will be made related to these employee stock grants.

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Capital Expenditures

The Company expects that its capital expenditures in 2007 will be similar to its expenditures in 2006, which were approximately $1.6 million. Planned capital expenditures for 2007 are primarily related to routine purchases of tissue processing, manufacturing, computer, and office equipment needed to support the Company’s business. The Company expects to have the flexibility to increase or decrease the majority of its planned capital expenditures depending on its ability to generate cash flows.

Forward-Looking Statements

This Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements give the Company’s current expectations or forecasts of future events. The words “could,” “may,” “might,” “will,” “would,” “shall,” “should,” “pro forma,” “potential,” “pending,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “future,” and other similar expressions generally identify forward-looking statements including, in particular, statements regarding future products or services, market expansion, revenues, cost savings, procurement, tissue processing yields, regulatory activity, available funds and capital resources, and pending litigation. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned notDue to place undue reliancethe number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may differ materially. The tables provided in this section for all named executive officers, except Mr. Lang, assume that the relevant termination or change of control event occurred on these forward-looking statements, which areDecember 31, 2015, the last business day of CryoLife’s 2015 fiscal year. The table for Mr. Lang provides information as of their respective dates. Such forward-looking statements reflectSeptember 8, 2015, the viewseffective date of managementhis separation from employment with us.

J. Patrick Mackin, Chairman, President, and Chief Executive Officer(1)

Executive Benefits and Payments Upon Termination ($)

   Voluntary
Retirement
  Good Reason or
Involuntary Not
for Cause
Termination
  For Cause
Termination
  Death  Disability  Change of
Control
Without Regard
to Termination
  Certain
Termination
Events
Following/

Preceding a
Change of
Control(10)
 

Cash Compensation

   288,099(2)   1,589,638(3)   288,099(2)   288,099 (2)   288,099 (2)   —      2,457,331(4) 

Accelerated Stock Option Exercisability

   —      —      —      —      —      180,931(5)   180,931(5) 

Accrued Vacation Pay

   4,615(6)   4,615(6)   4,615(6)   4,615 (6)   4,615 (6)   —      4,615 (6) 

Medical Benefits

   —      28,230(7)   —      28,230 (7)   28,230 (7)   —      28,230 (7) 

Spread Value of Vested Options

   176,604(8)   176,604(8)   176,604(8)   176,604(8)   176,604    176,604(8)   176,604(8) 

Accelerated Vesting of Restricted Stock

   —      —      —      —      —      3,457,249(9)   3,457,249 (9) 

Total

   469,318    1,799,087    469,318    497,548    497,548    3,814,784    6,304,960  

(1)This table assumes that all termination and change of control events occurred as of December 31, 2015. SeeEmployment, Separation and Release, and Change of Control Agreements above for a description of Mr. Mackin’s employment agreement (the “Mackin Agreement”).
(2)Amount shown represents the company-performance components of the 2015 annual incentive plan, to which Mr. Mackin was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(3)Amount shown represents 1.5 times Mr. Mackin’s 2015 annual base salary and the 2014 bonus which would have been paid had Mr. Mackin been employed for the full year of 2014, as the 2015 bonus had not been paid as of December 31, 2015. The Mackin Agreement provides for severance payments to be paid in 18 monthly installments, beginning 30 days following the employment termination date (subject to any delay in payment necessary to comply with Section 409A of the Internal Revenue Code). Mr. Mackin’s estate would receive these severance payments upon his subsequent death. This amount also includes the company-performance components of the 2015 annual incentive plan, to which Mr. Mackin was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(4)Amount shown represents 2.5 times Mr. Mackin’s 2015 annual base salary and the 2014 bonus which would have been paid had Mr. Mackin been employed for the full year of 2014, as the 2015 bonus had not been paid as of December 31, 2015. The Mackin Agreement provides for severance payments to be paid in 18 monthly installments, beginning 30 days following the employment termination date (subject to any delay in payment necessary to comply with Section 409A of the Internal Revenue Code). This scenario assumes that following the change of control, Mr. Mackin terminated his employment for good reason, or we terminated his employment without cause. Mr. Mackin would also receive the amount shown if we terminated his employment without cause at any time within the six months prior to the change of control. This amount also includes the company-performance components of the 2015 annual incentive plan, to which Mr. Mackin was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(5)The Second Amended and Restated 2009 Stock Incentive Plan provides that the exercisability of outstanding options accelerates upon a change of control. The accelerated options had value as of December 31, 2015 to the extent that the exercise prices of the options were lower than the closing price of our common stock on the NYSE as of December 31, 2015 of $10.78. The value for each option is calculated as the difference between the exercise price of the option and the closing price of our common stock at the end of the fiscal year.
(6)Amount shown represents payment of $288.46 per hour of 2015 vacation pay that Mr. Mackin had not taken as of December 31, 2015. Mr. Mackin had 16 accumulated hours of vacation as of December 31, 2015 for which we were obligated to make payment as of that date.
(7)Under the terms of the Mackin Agreement, if Mr. Mackin terminates his employment for good reason, we terminate his employment without cause, or he dies or becomes disabled, we would continue to provide him and his family with health benefits coverage, at our expense, for up to 18 months (until he is provided comparable benefits by another employer). Amount shown represents the value of 18 months of coverage under our health plans.
(8)Amount shown represents the spread value of Mr. Mackin’s vested stock options, calculated as the difference between the exercise prices of the options and the closing price of our common stock on December 31, 2015 ($10.78).
(9)We issued Mr. Mackin’s new-hire, performance-based restricted stock from the Second Amended and Restated 2009 Stock Incentive Plan. That plan provides that all unvested shares of restricted stock become fully vested upon a change of control. The shares of accelerated restricted stock are valued at the closing price of our common stock on the NYSE on December 31, 2015 ($10.78).
(10)Under the terms of the Mackin Agreement, amounts shown that are otherwise payable to Mr. Mackin would be reduced if and to the extent that doing so would cause payments that are contingent on a change of control to not be subject to the excise tax under Section 4999 of the Internal Revenue Code and thereby produce a greater net after-tax amount to him.

D. Ashley Lee, Executive Vice President, Chief Operating Officer, and Chief Financial Officer (1)

Executive Benefits and Payments Upon Termination ($)

   Voluntary
Termination
  Good Reason
or Involuntary
Not for Cause
Termination
  For Cause
Termination
  Death  Disability  Change of
Control
Without
Regard to
Termination
  Certain
Termination
Events Following/

Preceding a
Change of Control
 

Cash Compensation

   180,542(2)   180,542 (2)   180,542 (2)   180,542 (2)   180,542 (2)   —      1,268,050(3) 

Accelerated Stock Option Exercisability

   —      —      —      —      —      34,885(4)   34,885(4) 

Accrued Vacation Pay

   28,923(5)   28,923 (5)   28,923 (5)   28,923 (5)   28,923 (5)   —      28,923(5) 

Spread Value of Vested Options

   748,736(6)   748,736 (6)   748,736 (6)   748,736 (6)   748,736 (6)   748,736(6)   748,736(6) 

Accelerated Vesting of Restricted Stock and Performance Stock Units

   —      —      —      —      —      761,368(7)   761,368(7) 

Total

   958,201    958,201    958,201    958,201    958,201    1,544,989    2,841,962  

(1)This table assumes that all termination and change of control events occurred as of December 31, 2015.
(2)Amount shown represents the company-performance components of the 2015 annual incentive plan, to which Mr. Lee was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(3)Amount shown is equal to two times the sum of Mr. Lee’s 2015 salary and his bonus for 2014 that was paid in cash in February 2015. This amount assumes that following a change of control Mr. Lee terminated his employment for good reason, or we terminated his employment without cause. Mr. Lee would also receive the amount shown if we terminated his employment without cause at any time within the six months prior to the change of control. Amount shown also includes the company-performance components of the 2015 annual incentive plan, to which Mr. Lee was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(4)The 2002 Stock Incentive Plan, the 2004 Employee Stock Incentive Plan, and the Second Amended and Restated 2009 Stock Incentive Plan provide that the exercisability of outstanding options accelerates upon a change of control. The accelerated options had value as of December 31, 2015 to the extent that the exercise prices of the options were lower than the closing price of our common stock on the NYSE as of December 31, 2015 of $10.78. The value for each option is calculated as the difference between the exercise price of the option and the closing price of our common stock at the end of the fiscal year.
(5)Amount shown represents payment of $180.77 per hour of 2015 vacation pay that Mr. Lee had not taken as of December 31, 2015. Mr. Lee had 160 accumulated hours of vacation as of December 31, 2015 for which we were obligated to make payments as of that date.
(6)Amount shown represents the spread value of Mr. Lee’s vested stock options, calculated as the difference between the exercise prices of the options and the closing price of our common stock on December 31, 2015 ($10.78).
(7)As of December 31, 2015, we had issued all outstanding shares of restricted stock and all performance stock units under the 2004 Employee Stock Incentive Plan and the Second Amended and Restated 2009 Stock Incentive Plan. Both plans provide that all unvested shares of restricted stock and performance stock units become fully vested upon a change of control. The accelerated restricted stock and performance stock units are valued at the closing price of our common stock on the NYSE on December 31, 2015 ($10.78), and the 2015 performance stock units are assumed to have been earned at target level.

Scott B. Capps, Vice President, Clinical Research(1)

Executive Benefits and Payments Upon Termination ($)

   Voluntary
Termination
  Good Reason or
Involuntary Not
for Cause
Termination
  For Cause
Termination
  Death  Disability  Change of
Control
Without
Regard to
Termination
  Certain
Termination
Events Following/

Preceding a
Change of Control
 

Cash Compensation

   93,312(2)   93,312(2)   93,312(2)   93,312(2)   93,312(2)   —      468,986(3) 

Accelerated Stock Option Exercisability

   —      —      —      —      —      20,931(4)   20,931(4) 

Accrued Vacation Pay

   22,422(5)   22,422(5)   22,422(5)   22,422(5)   22,422(5)   —      22,422(5) 

Spread Value of Vested Options

   405,775(6)   405,775(6)   405,775(6)   405,775(6)   405,775(6)   405,775(6)   405,775(6) 

Accelerated Vesting of Restricted Stock and Performance Stock Units

   —      —      —      —      —      456,789(7)   456,789(7) 

Total

   521,509    521,509    521,509    521,509    521,509    883,495    1,374,903  

(1)This table assumes that all termination events occurred as of December 31, 2015.
(2)Amount shown represents the company-performance components of the 2015 annual incentive plan, to which Mr. Capps was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(3)Amount shown is equal to one times the sum of Mr. Capps’s 2015 salary and his bonus for 2015 that was paid in February 2016. This amount assumes that following a change of control Mr. Capps terminated his employment for good reason, or we terminated his employment without cause. Mr. Capps would also receive the amount shown if we terminated his employment without cause at any time within the six months prior to the change of control. Amount shown also includes the company-performance components of the 2015 annual incentive plan, to which Mr. Capps was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(4)The 2004 Employee Stock Incentive Plan and the Second Amended and Restated 2009 Stock Incentive Plan provide that the exercisability of outstanding options accelerates upon a change of control. The accelerated options had value as of December 31, 2015 to the extent that the exercise prices of the options were lower than the closing price of our common stock on the NYSE as of December 31, 2015 of $10.78. The value for each option is calculated as the difference between the exercise price of the option and the closing price of our common stock at the end of the fiscal year.
(5)Amount shown represents payment of $140.14 per hour of 2015 vacation pay that Mr. Capps had not taken as of December 31, 2015. Mr. Capps had 160 accumulated hours of vacation as of December 31, 2015 for which we were obligated to make payment as of that date.
(6)Amount shown represents the spread value of Mr. Capps’s vested stock options, calculated as the difference between the exercise prices of the options and the closing price of our common stock on December 31, 2015 ($10.78).
(7)As of December 31, 2015, we had issued all outstanding shares of restricted stock and all performance stock units under the 2004 Employee Stock Incentive Plan and the Second Amended and Restated 2009 Stock Incentive Plan. Both plans provide that all unvested shares of restricted stock and performance stock units become fully vested upon a change of control. The accelerated restricted stock and performance stock units are valued at the closing price of our common stock on the NYSE on December 31, 2015 ($10.78), and the 2015 performance stock units are assumed to have been earned at target level.

David C. Gale, Vice President, Research & Development(1)

Executive Benefits and Payments Upon Termination ($)

   Voluntary
Termination
  Good Reason or
Involuntary Not
for Cause
Termination
  For Cause
Termination
  Death  Disability  Change of
Control
Without
Regard to
Termination
  Certain
Termination
Events Following/

Preceding a
Change of Control
 

Cash Compensation

   81,436(2)   81,436(2)   81,436(2)   81,436(2)   81,436(2)    409,303(3) 

Accelerated Stock Option Exercisability

        20,931(4)   20,931(4) 

Accrued Vacation Pay

   2,446(5)   2,446(5)   2,446(5)   2,446(5)   2,446(5)    2,446(5) 

Spread Value of Vested Options

   96,179(6)   96,179(6)   96,179(6)   96,179(6)   96,179(6)   96,179(6)   96,179(6) 

Accelerated Vesting of Restricted Stock and Performance Stock Units

        456,789(7)   456,789(7) 

Total

   180,061    180,061    180,061    180,061    180,061    573,899    985,648  

(1)This table assumes that all termination events occurred as of December 31, 2015.
(2)Amount shown represents the company-performance components of the 2015 annual incentive plan, to which Mr. Gale was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(3)Amount shown is equal to one times the sum of Mr. Gale’s 2015 salary and his bonus for 2014 that was paid in February 2015. This amount assumes that following a change of control Mr. Gale terminated his employment for good reason, or we terminated his employment without cause. Mr. Gale would also receive the amount shown if we terminated his employment without cause at any time within the six months prior to the change of control. Amount shown also includes the company-performance components of the 2015 annual incentive plan, to which Mr. Gale was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(4)The 2004 Employee Stock Incentive Plan and the Second Amended and Restated 2009 Stock Incentive Plan provide that the exercisability of outstanding options accelerates upon a change of control. The accelerated options had value as of December 31, 2015 to the extent that the exercise prices of the options were lower than the closing price of our common stock on the NYSE as of December 31, 2015 of $10.78. The value for each option is calculated as the difference between the exercise price of the option and the closing price of our common stock at the end of the fiscal year.
(5)Amount shown represents payment of $122.31 per hour of 2015 vacation pay that Mr. Gale had not taken as of December 31, 2015. Mr. Gale had 20 accumulated hours of vacation as of December 31, 2015 for which we were obligated to make payment as of that date.
(6)Amount shown represents the spread value of Mr. Gale’s vested stock options, calculated as the difference between the exercise prices of the options and the closing price of our common stock on December 31, 2015 ($10.78).
(7)As of December 31, 2015, we had issued all outstanding shares of restricted stock and all performance stock units under the 2004 Employee Stock Incentive Plan and the Second Amended and Restated 2009 Stock Incentive Plan. Both plans provide that all unvested shares of restricted stock and performance stock units become fully vested upon a change of control. The accelerated restricted stock and performance stock units are valued at the closing price of our common stock on the NYSE on December 31, 2015 ($10.78), and the 2015 performance stock units are assumed to have been earned at target level.

Jean F. Holloway, Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer(1)

Executive Benefits and Payments Upon Termination ($)

   Voluntary
Termination
  Good Reason or
Involuntary Not
for Cause
Termination
  For Cause
Termination
  Death  Disability  Change of
Control
Without
Regard to
Termination
  Certain
Termination
Events Following/

Preceding a
Change of Control
 

Cash Compensation

   72,836(2)   72,836(2)   72,836(2)   72,836(2)   72,836(2)    374,836(3) 

Accelerated Stock Option Exercisability

        26,650(4)   26,650(4) 

Accrued Vacation Pay

   4,646(5)   4,646(5)   4,646(5)   4,646(5)   4,646(5)    4,646(5) 

Spread Value of Vested Options

        

Accelerated Vesting of Restricted Stock and Performance Stock Units

        254,749(6)   254,749(6) 

Total

   77,482    77,482    77,482    77,482    77,482    281,399    660,881  

(1)This table assumes that all termination events occurred as of December 31, 2015.
(2)Amount shown represents the company-performance components of the 2015 annual incentive plan, to which Ms. Holloway was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(3)Amount shown is equal to one times the sum of Ms. Holloway’s 2015 salary (because no bonus was paid to Ms. Holloway for the prior year 2014). This amount assumes that following a change of control Ms. Holloway terminated her employment for good reason, or we terminated her employment without cause. Ms. Holloway would also receive the amount shown if we terminated his employment without cause at any time within the six months prior to the change of control. Amount shown also includes the company-performance components of the 2015 annual incentive plan, to which Ms. Holloway was entitled as of December 31, 2015. No amount is included for the personal performance component of the annual incentive plan.
(4)The 2004 Employee Stock Incentive Plan and the Second Amended and Restated 2009 Stock Incentive Plan provide that the exercisability of outstanding options accelerates upon a change of control. The accelerated options had value as of December 31, 2015 because the exercise prices of the options were lower than the closing price of our common stock on the NYSE as of December 31, 2015 of $10.78. The value for each option is calculated as the difference between the exercise price of the option and the closing price of our common stock at the end of the fiscal year.
(5)Amount shown represents payment of $145.19 per hour of 2015 vacation pay that Ms. Holloway had not taken as of December 31, 2015. Ms. Holloway had 32 accumulated hours of vacation as of December 31, 2015 for which we were obligated to make payment as of that date.
(6)As of December 31, 2015, we had issued all outstanding shares of restricted stock and all performance stock units under the 2004 Employee Stock Incentive Plan and the Second Amended and Restated 2009 Stock Incentive Plan. Both plans provide that all unvested shares of restricted stock and performance stock units become fully vested upon a change of control. The accelerated restricted stock and performance stock units are valued at the closing price of our common stock on the NYSE on December 31, 2015 ($10.78), and the 2015 performance stock units are assumed to have been earned at target level.

David P. Lang, Senior Vice President, International Sales & Marketing(1)

Executive Benefits and Payments Upon Termination ($)

Good Reason or
Involuntary Not for
Cause Termination

Cash Compensation

276,000(2)

Annual Incentive Bonus

75,637(3)

Outplacement Benefits

15,000(4)

Reimbursement of COBRA Premium Differential

13,847(5)

Accrued Vacation Pay

12,739(6)

Spread Value of Vested Options

410,420(7)

Total

803,643

(1)Table summarizes the benefits provided (or accrued) to Mr. Lang upon his separation from employment, which occurred effective September 8, 2015.
(2)Amount shown represents cash payments equal to 12 months’ of Mr. Lang’s annual base salary in effect as of the date of his separation from employment with the company; this amount is payable to Mr. Lang pursuant to the Lang Agreement.
(3)Amount shown represents Mr. Lang’s actual 2015 annual incentive bonus, including the personal performance component, as specified in the Lang Agreement.
(4)Amount shown represents the reimbursements actually received by Mr. Lang upon his separation of employment.
(5)Amount shown represents reimbursement of COBRA premium differential actually received by Mr. Lang upon his separation of employment. The actual amount paid may be lower, as this right to reimbursement ceases upon Mr. Lang becoming eligible to participate under another employer’s group health plan.
(6)Amount shown represents payment of $132.69 per hour of 2015 vacation pay that Mr. Lang had not taken as of September 8, 2015. Mr. Lang had 96 accumulated hours of vacation as of that date.
(7)Amount shown represents the spread value of Mr. Lang’s vested stock options, calculated as the difference between the exercise prices of the options and the closing price of our common stock on September 8, 2015 ($9.85).

Director Compensation

Elements of Non-Employee Director Compensation

Annual Retainer and Committee Chair Fees

Each of the time such statementsnon-employee Directors of CryoLife receives an annual cash retainer for service on the Board of Directors, service on committees of the Board of Directors, service as the Chair of the committees of the Board of Directors and service as Presiding Director, as applicable and as noted in the table below. CryoLife pays all cash retainers on a monthly basis. Currently, the Presiding Director is also the Chair of the Corporate Governance Committee, and he does not receive any additional compensation for his position as Chair of that committee.

2015 Board of Director Retainers

Annual Board Service

  $40,000    

Presiding Director(1)

  $25,000    

Committee

  Committee Chair Retainer(2)   Committee Membership Retainer 

Audit

  $15,000    $7,500  

Compensation

  $10,000    $5,000  

Corporate Governance

  $7,500    $3,750  

Regulatory Affairs and Quality Assurance

  $7,500    $3,750  

(1)In addition to Annual Board Service Retainer
(2)Includes committee membership retainer

Restricted Stock Grants

A portion of the non-employee Directors’ annual compensation is issued as restricted stock. The shares of restricted stock are madeissued each year following the annual meeting of shareholders, and all shares vest on the first anniversary of issuance or May 15 following the year of grant, whichever date is earlier. The Director will forfeit any unvested portion of the award if he or she ceases to serve as a Director for certain reasons described within the stock plan. With respect to 2015 grants, the Committee recommended a grant value of $100,000 per director and in September 2015, the Committee granted 10,352 shares of restricted stock to each of the non-employee Directors. The size and terms of the grants are subject to annual reevaluation by the Compensation Committee. All equity grants to Non-Employee Directors in 2015 were made pursuant to the Equity and Cash Incentive Plan.

DIRECTOR COMPENSATION

The following table provides compensation information for the one-year period ended December 31, 2015, for each person who was a member of our Board of Directors in 2015, other than J. Patrick Mackin:

Name

  Fees Earned or Paid in Cash(1)
($)
   Stock Awards(2)
($)
   Total
($)
 
(a)  (b)   (c)   (d) 

Thomas F. Ackerman

   47,500     99,793     147,293  

James S. Benson

   51,250     99,793     151,043  

Daniel J. Bevevino

   52,500     99,793     152,293  

Ronald C. Elkins, M.D.

   53,750     99,793     153,543  

Ronald D. McCall, Esq.

   65,000     99,793     164,793  

Harvey Morgan

   58,750     99,793     158,543  

Jon W. Salveson

   43,750     99,793     143,543  

(1)Amounts shown include annual retainer, committee chair and committee member retainers, and, for Mr. McCall, a Presiding Director retainer, earned by our Directors during 2015.
(2)The amount shown represents the aggregate grant date fair value of the 10,352 restricted shares granted to each of the non-employee Directors, as calculated in in accordance with FASB ASC Topic 718. We issued the awards on September 10, 2015, and we valued them at $9.64 per share, which was the closing price on the grant date. See Notes 1 and 16 of the Notes to Consolidated Financial Statements filed with CryoLife’s Annual Report on Form 10-K for the year ended December 31, 2015 for assumptions we used in valuing restricted stock awards. The restricted stock represented here vests on May 15, 2016; accordingly, these shares remained subject to vesting restrictions as of December 31, 2015.

J. Patrick Mackin, Chairman, President, and Chief Executive Officer received no compensation in 2015 for his services as a Director of CryoLife, other than his executive officer compensation detailed in the “Summary Compensation Table”.

Director Stock Ownership Requirements

In November 2015, the Corporate Governance Committee approved a change to the non-employee Director stock ownership requirements to 5 times the then current annual retainer for non-employee directors. All non-employee directors currently satisfy this standard. The Compensation Committee evaluates stock ownership requirements for non-employee directors on an annual basis.

Non-GAAP Financial Measure Information

Set forth below is important information about the following non-GAAP financial measures referred to herein:

Adjusted net income

Adjusted EBITDA

Adjusted inventory

Accounts receivable – days sales outstanding

Although we believe that these measures are useful tools, no single financial measure provides all of the information that is necessary to gain a complete understanding of our performance, condition, and liquidity. Therefore these numbers are intended to be, and should be, evaluated in the context of the full

information provided in our annual report on Form 10-K, including the financial statements presented in accordance with GAAP, the footnotes thereto, and the accompanying management’s discussion and analysis, as well as in our other filings with the SEC.

Adjusted Net Income

As discussed herein, annual bonuses paid to executives under our short-term incentive plan are partially conditioned upon the achievement of specified levels of “adjusted net income.” The use of this non-GAAP, adjusted performance measures in the short-term incentive plan was intended to create a stronger performance incentive by focusing on controllable variables within the core business and to minimize unintended consequences by excluding items that were highly variable or difficult to predict during the goal-setting process. We disclosed herein the actual 2015 performance results using this non-GAAP measure so that investors may see the extent to which the goals were achieved. We believe disclosing this information is useful because it helps explain how challenging our annual bonus targets are over time.

Adjusted net income for 2015 was calculated as net income exclusive of:

Interest expense and income

Stock compensation expense, other than stock compensation expense related to the bonus plan

Research and development expense, excluding salaries and related expenses

Other income and expense

Income taxes

Grant revenue

Charges related to acquisitions, licenses, business development, integration costs, and litigation costs

Unbudgeted executive severance expenses and on-boarding costs

The tables below provide reconciliations of 2015 adjusted net income to 2015 net income under GAAP:

2015 Adjusted Net Income (in Thousands)

2015 Adjusted Net Income

  $20,366  

Interest income/expense, net

   107  

Stock compensation expense, excluding stock compensation expense related to the bonus program itself

   (5,089

Research and development expense, excluding that portion pertaining to salaries and related expenses

   (4,217

Other income, net

   407  

Income tax expense, net

   (1,863

Grant revenues

   —    

Charges related to acquisitions, licenses, business development or integration costs

   (3,007

Litigation

   (1,143

Unbudgeted executive severance expenses and on-boarding costs

   (1,556
  

 

 

 

2015 GAAP Net Income

  $4,005  
  

 

 

 

Adjusted EBITDA

As discussed in this Amendment No. 1 to Annual Report on Form 10-K, the 2015 annual grants of performance stock units to executives are conditioned 80% upon the Company’s achievement of pre-determined levels of adjusted EBITDA, 10% upon the achievement of target levels of adjusted inventory, and 10% upon the achievement of target levels of accounts receivable –DSO. The use of these non-GAAP adjusted performance measures was intended to create a stronger performance incentive by focusing on controllable variables within the core business and to minimize unintended consequences by excluding items that were highly variable or difficult to predict during the goal-setting process.

Adjusted EBITDA is calculated as net income before interest, taxes, depreciation and amortization, as further adjusted by removing the impact of the following:

stock-based compensation

research and development expenses (excluding salaries and related expense)

grant revenue

litigation expense or income

acquisition, license, and other business development expense

integration costs (including any litigation costs or income related to assumed litigation)

other income or expense

unbudgeted executive severance expenses and onboarding costs

Adjusted Inventory and Accounts Receivable–DSO

The adjusted inventory performance measure is calculated as our medical device products inventory (finished goods and work in process) and raw materials, exclusive of (i) inventories of ProCol® and PhotoFixTM, two products that we distributed in 2015 for third parties, and (ii) such inventories associated with acquired companies or assets. Accounts receivable – DSO is calculated by dividing (x) trade accounts receivable (net) as of December 31, 2015 by (y) net credit sales for the fourth quarter of 2015 (excluding from such calculation accounts receivable and sales associated with acquired companies or assets), and multiplying such amount by 92.

The table below provides a reconciliation of 2015 adjusted EBITDA to 2015 net income under GAAP:

2015 Adjusted EBITDA Reconciliation (In Thousands)

2015 Adjusted EBITDA

  $26,229  

Amortization expense

   (2,135

Depreciation expense

   (3,728

Other income, net

   407  

Litigation

   (1,143

Interest income/expense, net

   107  

Income tax expense, net

   (1,863

Charges related to acquisitions, licenses, business development or integration costs

   (3,007

Research and development expense, excluding that portion pertaining to salaries and related expenses

   (4,217

Stock compensation expense, excluding stock compensation expense related to the bonus program itself

   (5,089

Unbudgeted executive severance expenses and on-boarding costs

   (1,556
  

 

 

 

2015 GAAP Net Income

  $4,005  
  

 

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters.

Equity Compensation Plan Information

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information about our common stock that, as of December 31, 2015, may be issued upon the exercise of options and rights under the following existing equity compensation plans (which are all of our equity compensation plans as of December 31, 2015):

   Equity Compensation Plan Information 

Plan Category

  Number of securities
issuable upon exercise
of outstanding options,
warrants and rights (a)
   Weighted-average
exercise price of
outstanding options,
warrants and rights (b)
   Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) (c)
 

Equity compensation plans approved by security holders

   2,177,000    $7.65     3,921,000  

Equity compensation plans not approved by security holders

   —       —       —    
  

 

 

   

 

 

   

 

 

 

Total

   2,177,000    $7.65     3,921,000  
  

 

 

   

 

 

   

 

 

 

CERTAIN BENEFICIAL OWNERSHIP

The name and address of each person or entity who owned beneficially 5% or more of the outstanding shares of common stock of CryoLife on March 21, 2016, based on information available to us, together with the number of risks, uncertainties, estimates,shares owned and assumptions, including, without limitation, in addition to those identifiedthe percentage of outstanding shares that ownership represents, is set forth in the text surrounding such statements, those identifiedfollowing table. The table also shows information concerning beneficial ownership by the named executive officers and by all current Directors and executive officers as a group. The number of shares beneficially owned is determined under Part I, Item 1A. “Risk Factors” and elsewhere in this Form 10-K.

All statements, other than statements of historical facts, included herein that address activities, events or developments that the Company expects or anticipates will or may occur in the future, are forward-looking statements, including statements regarding:

The adequacy of product liability insurance to defend against lawsuits;

Increases in product liability insurance coverage costs, retention, and claims years covered;

The outcome of lawsuits filed against the Company, andrules of the SEC, investigation;

The impactand the information is not necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days after March 21, 2016 through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole investment and voting powers, or shares such powers with his or her spouse, with respect to the shares set forth in the following table. To CryoLife’s knowledge, none of the FDA Order and subsequent FDA activity, including the FDA’s letters regarding the SynerGraft process and measures taken by the Company as a result, on future revenues, profits, and business operations;

The impact of the FDA’s Form 483 Notices of Observation;

The Company’s estimated future liability for existing product liability lawsuits and for product liability claims incurred but not yet reported;

The Company’s ability to increase yields and reduce its costs of tissue preservation services;

The Company’s competitive position, including the impact of price increases;

The receipt of governmental grants for BioFoam development;

The results of patient studies and their use in applying for governmental approval for products and services;

The outcome of the Company’s regulatory applications regarding its SynerGraft process;

Future increases in research and development expenses;

Competitive advantages offered by the Company’s patents, trade secrets, trademarks, and technology licensing rights;

64


Product demand and market growth;

The success of the RTI Agreement, including anticipated cost savings and increased procurement of cardiovascular and vascular tissues;

The potential of the ACT for use in fibrinolysis (blood clot dissolving) and other drug delivery applications;

Expected revenue and earnings growth from recently announced strategic agreements;

Expected impact of adoption of new accounting pronouncements;

The impact on the Company of adverse publicity or negative surgical outcomes from products or services provided by the Company;

Anticipated future revenues and expenses;

Expected seasonality trends;

Anticipated decreases in cash payments related to the defense and resolution of lawsuits and claims from the levels seen in 2003 through 2006;

Anticipated impact of changes in interest rates;

The ability to expand the Company’s service and product offerings;

The success of distribution, supplier and development agreements with third parties to distribute, supply and develop various Company, as well as third party, products and services;

Those issues most likely to impact the Company’s future financial performance and cash flows;

The Company’s ability to implement its strategic plans;

The adequacy of the Company’s financial resources and its ability to borrow under its credit facility; and

Other statements regarding future plans and strategies, anticipated events, or trends.

These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, and expected future developments as well as other factors it believes are appropriateshares shown in the circumstances. However, whether actual results and developments will conform with the Company’s expectations and predictionstable below is subject to a number of risks and uncertainties which could cause actual results to differ materially from the Company’s expectations, including the risk factors discussed in this Form 10-K and other factors, many of which are beyond the control of CryoLife. Consequently, all of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements and there can be no assurance that the actual resultspledge or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. The Company assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise.similar arrangement.

 

Item 7A.Quantitative

Beneficial Owner

Number of Shares of
CryoLife Common Stock
Beneficially Owned (#)
Percentage of Outstanding
Shares of CryoLife Common
Stock

(%)

J. Patrick Mackin

603,552(1)1.84

D. Ashley Lee

477,303(2)1.46

Scott B. Capps

203,987(3)

David C. Gale

132,834(4)

Jean F. Holloway

63,181(5)

David P. Lang

115,108(6)

Thomas F. Ackerman

95,704

James S. Benson

80,704

Daniel J. Bevevino

95,704

Ronald C. Elkins, MD

108,204

Ronald D. McCall

183,866

Harvey Morgan

86,954

Jon W. Salveson

75,704

Blackrock, Inc.

2,608,091(7)8.01

Paul Royalty Fund, L.P.

2,648,184(8)8.13

Steven G. Anderson

1,855,931(9)5.70

All current Directors and Qualitative Disclosures About Market Risk.Named Executive Officers as a group (13 persons)

2,292,805(10)7.03

Interest Rate Risk

The Company’s interest income and expense are sensitive to changes in the general level of United States interest rates. In this regard, changes in United States interest rates affect the interest earned on the Company’s cash and cash equivalents of $4.1 million and the interest incurred on the line of credit balance of $4.5 million as of December 31, 2006. The Company’s short-term investments in marketable securities of $4.0 million as of December 31, 2006 can also be affected by changing

65


interest rates to the extent that these items contain variable interest rates or are subject to maturity or sale during a period of changing interest rates. A 10% adverse change in interest rates affecting the Company’s cash equivalents and short-term investments or borrowings under the Company’s Credit Agreement would not have a material impact on the Company’s financial position, results of operations, or cash flows.

Derivative Valuation Risk

The terms of the Company’s March 18, 2005 6% convertible preferred stock offering include a Dividend Make-Whole Payment feature. This feature is considered an embedded derivative instrument. Due to the quarterly revaluation of the derivative liability, the Company recorded other expense of $121,000 for the twelve months ended December 31, 2006. At December 31, 2006 the derivative liability was valued at $235,000. The fair value of this derivative is based on various factors, including the market price of the Company’s common stock and discount rates used in determination of fair value. Changes in these factors could cause the fair value of this derivative to fluctuate significantly from period to period. These resulting changes in valuation may have a significant impact on the Company’s results of operations.

Foreign Currency Exchange Rate Risk

The Company has balances, such as accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These foreign currency transactions are sensitive to changes in exchange rates. In this regard, changes in exchange rates could cause a change in the U.S. dollar equivalent funds that the Company will receive in payment for assets or that the Company would have to pay to settle liabilities. As a result the Company could be required to record these changes as gains or losses on foreign currency translation. A 10% adverse change in foreign currency rates affecting the Company’s balances denominated in foreign currencies would not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

Item 8.*Financial StatementsOwnership represents less than 1% of outstanding CryoLife common stock.
(1)Amount includes 161,703 shares subject to options that are either presently exercisable or will become exercisable within 60 days after March 21, 2016. This amount also includes 73,316 shares of unvested restricted stock subject to forfeiture which Mr. Mackin holds as of March 21, 2016. This amount does not include 19,946 shares earned under 2015 performance stock unit awards that had not vested as of March 21, 2016, and Supplementary Data.that will not vest within 60 days thereafter, or performance stock units granted in February 2016 (42,484 shares at target performance).
(2)Amount includes 152,457 shares subject to options that are either presently exercisable or will become exercisable within 60 days after March 21, 2016. This amount also includes 5,000 shares held by Mr. Lee’s spouse and 1,500 shares held in trust for Mr. Lee’s children. This amount also includes 45,734 shares of unvested restricted stock subject to forfeiture which Mr. Lee holds as of March 21, 2016. This amount does not include 10,062 shares earned under 2014 and 2015 performance stock unit awards that had not vested as of March 21, 2016, and that will not vest within 60 days thereafter, or performance stock units granted in February 2016 (13,072 shares at target performance). The business address for all CryoLife employees is: c/o CryoLife, Inc., 1655 Roberts Boulevard, NW, Kennesaw, GA 30144.

(3)Amount includes 79,808 shares subject to options that are either presently exercisable or will become exercisable within 60 days after March 21, 2016. This amount also includes 24,752 shares of unvested restricted stock subject to forfeiture that Mr. Capps holds as of March 21, 2016. This amount does not include 6,038 shares earned under 2014 and 2015 performance stock unit awards that had not vested as of March 21, 2016, and that will not vest within 60 days thereafter, or performance stock units granted in February 2016 (7,353 shares at target performance).
(4)Amount includes 36,476 shares subject to options that are either presently exercisable or will become exercisable within 60 days after March 21, 2016. This amount also includes 24,752 shares of unvested restricted stock subject to forfeiture that Mr. Gale holds as of March 21, 2016. This amount does not include 6,038 shares earned under 2014 and 2015 performance stock unit awards that had not vested as of March 21, 2016, and that will not vest within 60 days thereafter, or performance stock units granted in February 2016 (7,353 shares at target performance).
(5)Amount includes 2,334 shares subject to options that are either presently exercisable or will become exercisable within 60 days after March 21, 2016. This amount also includes 26,496 shares of unvested restricted stock subject to forfeiture that Ms. Holloway holds as of March 21, 2016. This amount does not include 4,692 shares earned under 2014 and 2015 performance stock unit awards that had not vested as of March 21, 2016, and that will not vest within 60 days thereafter, or performance stock units granted in February 2016 (9,314 shares at target performance).
(6)Amount includes 41,667 shares subject to options that are either presently exercisable or will become exercisable within 60 days after March 21, 2016.
(7)Information based on Schedule 13G/A filed on January 26, 2016 by BlackRock, Inc. (“BlackRock”). Per this schedule, BlackRock has the sole power to vote, or to direct the vote of, and sole power to dispose, or to direct the disposition of, these shares of CryoLife common stock. The address for BlackRock is BlackRock, Inc., 55 East 52nd Street, New York, NY 10055.
(8)Information based on Schedule 13G filed on January 28, 2016 by Paul Royalty Fund, L.P. Per this schedule, Paul Royalty Fund, L.P. shares the power to vote, or to direct the vote of, and the power to dispose, or to direct the disposition of, these shares of CryoLife common stock with Paul Capital Management LLC and Paul Capital Advisors, L.L.C. (collectively, the “Paul Entities”). The address for the Paul Entities is 575 Market Street, Suite 2500, San Francisco, CA 94105.
(9)Information based on Schedule 13G/A filed on February 3, 2016 by Steven G. Anderson. Per this schedule, Steven G. Anderson has sole power to vote, or to direct the vote of, and the power to dispose, or to direct the disposition of, 1,748,007 of these shares of CryoLife common stock. Mr. Anderson shares the power to vote, or to direct the vote of, and the power to dispose, or to direct the disposition of, 107,924 of these shares of CryoLife common stock with his spouse. The address for Mr. Anderson is c/o Arnall Golden Gregory LLP, 171 17th St. NW, Suite 2100, Atlanta, GA, 30363.
(10)Amount includes:

Our financial statements

474,445 shares subject to options that are presently exercisable or will become exercisable within 60 days after March 21, 2016

54,000 shares held of record by the spouses of executive officers and supplementary data requiredDirectors

1,500 shares held of record by this item are submittedthe children of an executive officer

267,514 shares of unvested restricted common stock subject to forfeiture that all current Directors and Executive Officers as a separate sectiongroup hold as of this annual report on Form 10-K. See “Financial Statements” commencing on page F-1.March 21, 2016.

This amount does not include performance stock units granted in February 2016, or 46,774 shares earned under 2013 and 2014 performance stock unit awards that had not vested as of March 21, 2016, and that will not vest within 60 days thereafter.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.Item 13. Certain Relationships and Related Transactions, and Director Independence.

Director Independence

Item 9A.Controls and Procedures.

TheIn addition to qualifying as “independent” within the meaning of Section 303A.02 of the NYSE Listed Company maintains disclosure controls and procedures (“Disclosure Controls”) as such term is defined underManual, each member of the Compensation Committee must be a “non-employee director” within the meaning of Rule 13a-15(e) promulgated16b-3 under the Securities Exchange Act of 1934. These Disclosure Controls are designed1934, as amended, and at least two members of the Compensation Committee must be “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. In determining the independence of any Director who will serve on the Compensation Committee, the Board of Directors will consider all factors specifically relevant to ensuredetermining whether such Director has a relationship with us that information requiredis material to the Director’s ability to be disclosedindependent from management in connection with the duties of a Compensation Committee member, including, but not limited to (i) the source of compensation of such Director, including any consulting, advisory, or other compensatory fee paid by us to the Director, and (ii) whether such Director is affiliated with us, one of our Exchange Act reportssubsidiaries, or an affiliate of one of our subsidiaries. For a detailed discussion of the independence of our committee members, reference is recorded, processed, summarized,made to the section “Standing Committees of the Board of Directors; Committee Assignments” to this Amendment No. 1 to Annual Report on Form 10-K.

In connection with its annual review in February 2016, and reportedbased on the information available to it, the Board of Directors determined that none of Messrs. Ackerman, Benson, Bevevino, McCall, Morgan, Salveson and Dr. Elkins has a material relationship with CryoLife, and that they each therefore qualify as independent Directors under the NYSE’s current Listing Standards.

Until February 2016, Mr. Ackerman was a Senior Financial Advisor with Charles River Laboratories International, Inc. CryoLife has made purchases from Charles River Laboratories relating to supplies for certain of its clinical trials in each of the last several years and anticipates doing so in the current year. The amount of these purchases falls within the time periods specifiedcategorical standards for commercial relationships described above that are not considered to be material relationships that would impair a Director’s independence. The Board of Directors determined that Mr. Ackerman’s relationship with Charles River Laboratories is not a material relationship that could impair his independence as it relates to his Director relationship with CryoLife. Purchases from Charles River Laboratories were made on an arm’s-length basis. It is the Board of Directors’ understanding that Mr. Ackerman’s compensation is in no way impacted by the size or amount of the business transacted between the two companies.

Dr. Elkins is a former Chief of the Section of Thoracic and Cardiovascular Surgery at the University of Oklahoma Health Sciences Center and is a Professor Emeritus of the Center. In 2014, the Center paid CryoLife for tissue preservation services and BioGlue® provided by CryoLife. Dr. Elkins’ son, Charles Craig Elkins, M.D., is a cardiac surgeon who has implanted CryoLife preserved cardiac tissues at Integris Baptist Medical Center in Oklahoma City. Integris Baptist Medical Center, along with the Integris SW Medical Center, paid CryoLife for tissue preservation services and BioGlue in 2014, and we expect this relationship to continue. The Board of Directors considered these relationships and determined that they are not material relationships that could impair Dr. Elkins’s independence.

Mr. Salveson is the Vice Chairman, Investment Banking and Chairman of the Healthcare Investment Banking Group at Piper Jaffray Companies. CryoLife has previously used the services of Piper Jaffray in connection with our stock buy-back program. However, that program expired in October 2014 and has not been renewed by the Board. CryoLife has also previously used Piper Jaffray in connection with certain transactions, and plans to continue to do so in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.

The Company’s management, including the Company’s President and CEO and the Company’s Executive Vice President of Finance, Chief Operating Officer, and CFO,future, however, Mr. Salveson does not expectpersonally work on any transactions between CryoLife and Piper Jaffray. After reviewing these relationships, the Board of Directors has determined that its Disclosure Controls will prevent all errorthey are not material relationships that could impair Mr. Salveson’s independence.

Item 14. Principal Accounting Fees and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance thatServices.

Fees Paid To the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake.

66


Based upon the Company’s most recent Disclosure Controls evaluation as of December 31, 2006, the CEO and CFO have concluded that the Company’s Disclosure Controls were effective at the reasonable assurance level to satisfy their objectives and to ensure that the information required to be disclosed by the Company in its periodic reports is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

During the quarter ended December 31, 2006, there were no changes in the Company’s internal control over financial reporting that materially affected or that are reasonably likely to materially affect the Company’s internal control over financial reporting.

The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Management’s Report on Internal Controls over Financial Reporting under Sarbanes-Oxley Section 404, included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report.

The attestation report called for by Item 308(b) of Regulation S-K is incorporated herein by reference to Report of Independent Registered Public Accounting Firm included in Part II, Item 8, “Financial Statementsfor Fiscal 2014 and Supplementary Data”Fiscal 2015

The following table presents Ernst & Young LLP’s professional service fees for the audit of this report.our annual financial statements for fiscal years ending 2014 and 2015, as well as fees for other services rendered during those periods.

   2015   2014 

Audit fees(1)

  $694,000    $532,000  

Audit-related fees

   —       —    

Tax fees(2)

  $91,000    $15,000  

All other fees(3)

  $226,000    $0  
  

 

 

   

 

 

 

Total

  $1,011,000    $547,000  

 

Item 9B.(1)Other Information.Includes work performed for the audit of our annual consolidated financial statements, the review of financial statements included in our quarterly Form 10-Q reports, the audit of internal control over financial reporting, and the services that an independent auditor would customarily provide in connection with statutory requirements, regulatory filings, and similar engagements for the fiscal year, such as comfort letters, attest services, consents, and assistance with review of documents filed with the SEC.
(2)Includes tax compliance and reporting services.
(3)Reflects work related to the due diligence for mergers and acquisitions.

None.Our Audit Committee approved all of the services described above. The Audit Committee has determined that the payments made to Ernst & Young LLP for these services are compatible with maintaining such firm’s independence.

Audit Committee’s Pre-approval Policies and Procedures

67


PART III

Item 10.Directors and Executive Officers of the Registrant.

The responseAudit Committee has the sole authority to Item 10appoint or replace, compensate, and oversee the work of any independent registered public accounting firm, who must be, when required, a registered firm as defined by law whose purpose is incorporated herein by referencethe preparation or issuance of an audit report or related work. The independent registered public accounting firm’s reports and other communications are to be delivered directly to the information set forth inAudit Committee, and the Proxy StatementAudit Committee is responsible for the Annual Meetingresolution of Shareholdersdisagreements between management and the independent registered public accounting firm regarding financial reporting.

The Audit Committee pre-approves all audit and non-audit services performed by the independent registered public accounting firm and all engagement fees and terms in connection therewith, except as otherwise permitted by federal law and regulations. To date, no services have been approved by the audit committee pursuant to be filed with the Commission not later than April 30, 2007, with the17 CFR 210.2-01(c)(7)(i)(C), which provides a limited exception of information concerning executive officers, which is included in Part I, Item 4A of this Form 10-K.

Item 11.Executive Compensation.

The response to Item 11 is incorporated herein by reference to the information set forthrequirement that services be approved in advance by the Proxy Statement for the Annual Meeting of Shareholders to be filed with the Commission not later than April 30, 2007.

Item 12.Security Ownership of Certain Beneficial Owners and Management.

The response to Item 12 is incorporated herein by reference to the information set forth in the Proxy Statement for the Annual Meeting of Shareholders to be filed with the Commission not later than April 30, 2007.

Item 13.Certain Relationships and Related Transactions.

The response to Item 13 is incorporated herein by reference to the information set forth in the Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission not later than April 30, 2007.

Item 14.Principal Accounting Fees and Services.

The response to Item 14 is incorporated herein by reference to the information set forth in the Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission not later than April 30, 2007.

68Audit Committee if certain conditions are met.


PART IV

Item 15. Exhibits, Financial Statement Schedules.

Item 15.Exhibits, Financial Statement Schedules.

The following are filed as part of this report:

 

(a)    (a)1.1. Consolidated Financial Statements begin on page F-1.Statements.

Consolidated Financial Statements begin on page F-1 of the Original Filing.

 

 2.2. Financial Statement ScheduleSchedules.

Schedule II—Valuation and Qualifying Accounts

All other financial statement schedules not listed above are omitted, as the required information is immaterial, not applicable, or the information is presented in the consolidated financial statements or related notes.

(b) Exhibits

3.Exhibits.

The information required by this Item is set forth on the exhibit index that follows the signature page of this Amendment No. 1 to Annual Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CRYOLIFE, INC.

March 25, 2016

By

/S/    J. PATRICK MACKIN        

J. Patrick Mackin

President, Chief Executive Officer, and

Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following exhibits are filed herewith or incorporated herein by reference:persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/S/    J. PATRICK MACKIN        

J. Patrick Mackin

President, Chief Executive Officer, and

Chairman of the Board of Directors

(Principal Executive Officer)

March 25, 2016

/S/    D. ASHLEY LEE        

D. Ashley Lee

Executive Vice President,

Chief Operating Officer, and

Chief Financial Officer

(Principal Financial Officer)

March 25, 2016

/S/    AMY D. HORTON        

Amy D. Horton

Chief Accounting Officer

(Principal Accounting Officer)

March 25, 2016

/S/    THOMAS F. ACKERMAN        

Thomas F. Ackerman

DirectorMarch 25, 2016

/S/    JAMES S. BENSON        

James S. Benson

DirectorMarch 25, 2016

/S/    DANIEL J. BEVEVINO        

Daniel J. Bevevino

DirectorMarch 25, 2016

/S/    RONALD C. ELKINS, M.D.        

Ronald C. Elkins, M.D.

DirectorMarch 25, 2016

/S/    RONALD D. MCCALL        

Ronald D. McCall

DirectorMarch 25, 2016

/S/    HARVEY MORGAN        

Harvey Morgan

DirectorMarch 25, 2016

/S/    JON W. SALVESON        

Jon W. Salveson

DirectorMarch 25, 2016

EXHIBITS

 

Exhibit

Number

 

Description

  2.1
    2.1+ Reserved.Series A Preferred Stock Purchase Agreement Among CryoLife, Inc., The Cleveland Clinic Foundation, and ValveXchange, Inc. dated July 6, 2011. (Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.)
    2.2Agreement and Plan of Merger, dated May 14, 2012, by and among CryoLife, Inc., CL Crown, Inc., Hemosphere, Inc. and a Stockholder Representative. (Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.)
    2.3Agreement and Plan of Merger, dated as of December 22, 2015, by and among CryoLife, Inc., On-X Life Technologies Holdings, Inc., Cast Acquisition Corporation, Fortis Advisors LLC and each of the security holders who becomes a party thereto. (Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed January 25, 2016.)
    3.1 Restated Articles of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2003.)
  3.2Certificate of Amendment to the Amended and Restated Articles of Incorporation of CryoLife, Inc., classifying and designating Series A Junior Participating Preferred Stock.. (Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 3, 2005.23, 2015.)
    3.33.2 Preferred Stock ArticlesBylaws of Amendment to the Articles of Incorporation of the Registrant. (Incorporated herein by reference to Exhibit 3.4 to the Registrant’s Form 8-A/A filed on March 15, 2005.)
  3.4Amended and Restated By-Laws.CryoLife, Inc. (Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed December 28, 2005.March 1, 2016.)
    4.1Reserved.
  4.2 Form of Certificate for the Company’s Common Stock. (Incorporated herein by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997.)
    4.3Reserved.
  4.4Reserved.
  4.5Form of Specimen Convertible Preferred Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8A/A filed March 15, 2005.)
  4.64.2 First Amended and Restated Rights Agreement, dated as of November 2, 2005, between CryoLife, Inc. and American Stock Transfer & Trust Company. (Incorporated herein by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed November 3, 2005.)
10.1    4.3 The StipulationRegistration Rights Agreement, dated as of SettlementJanuary 20, 2016, by and between CryoLife, Inc. and the Investors party thereto. (Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed January 25, 2016.)
    4.4Form of Indenture for Senior Debt Securities (Incorporated herein by reference to Exhibit 4.7 to the shareholder derivative action datedRegistrant’s Registration Statement on Form S-3 filed August 1, 2005.5, 2015 (No. 333-206119).)
    4.5Form of Subordinated Indenture for Subordinated Debt Securities (Incorporated herein by reference to Exhibit 4.9 to the Registrant’s Registration Statement on Form S-3 filed August 5, 2015 (No. 333-206119).)
  10.1†CryoLife, Inc. 2007 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s CurrentQuarterly Report on Form 8-K filed August 5, 2005.10-Q for the quarter ended March 31, 2007.)
10.1(a) The Stipulation of Settlement of securities class action litigationFirst Amendment, dated August 29, 2005.July 24, 2012, to the CryoLife, Inc. 2007 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10.510.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.2012.)
10.2+  10.1(b) Credit Agreement byCryoLife, Inc. Equity and between CryoLife, Inc., Certain Subsidiaries of CryoLife, Inc., and Wells Fargo Foothill, Inc., dated February 8, 2005.Cash Incentive Plan. (Incorporated herein by reference to Exhibit 10.210.3 to the Registrant’s AnnualQuarterly Report on Form 10-K for the fiscal year ended December 31, 2004.10-Q filed July 28, 2015.)
10.2(a)First Amendment to the Credit Agreement signed on September 27, 2005, amends the February 8, 2005 Credit Agreement between Wells Fargo Foothill, Inc., CryoLife, Inc., and its subsidiaries. (Incorporated herein by reference to Exhibit 10.2.1 to Form 8-K dated and filed on September 27, 2005.)

69


Exhibit
Number

Description

10.2(b)*Second Amendment to the Credit Agreement, dated October 17, 2006, amends the February 8, 2005 Credit Agreement between Wells Fargo Foothill, Inc., CryoLife, Inc., and its subsidiaries, as amended on September 27, 2005.
10.3Reserved.
10.4  10.2† CryoLife, Inc. 1998 Long-Term Incentive Plan. (Incorporated herein by reference to Appendix 1 to the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 17, 1998.)
10.5*+  10.3† Exchange and ServiceForm of 2012 Grant Agreement dated December 15, 2006, by and betweento Executive Officers pursuant to the CryoLife, Inc. and Regeneration Technologies, Inc. and its affiliates RTI Donor Services, Inc. and Regeneration Technologies, Inc. – Cardiovascular.2007 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10.7 to the Registrant’s Annual Report on 10-K for the fiscal year ended December 31, 2012.)

10.6Reserved.
10.7  10.3(a)† Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2002 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed August 7, 2006.)
10.8  10.3(b)† Reserved.Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 2, 2007.)
10.9(a)  10.4†Form of Incentive Stock Option Grant Agreement under the 1998 Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 2, 2007.)
  10.5† Employment Agreement, dated as of October 23, 2012, by and between the Company and Steven G. Anderson, dated September 5, 2005.Anderson. (Incorporated herein by reference to Exhibit 10.110.9 to Form 8-K dated September 5, 2005 and filed September 9, 2005.the Registrant’s Annual Report on 10-K for the fiscal year ended December 31, 2012.)
10.9(b)  10.5(a)† First Amendment, dated as of May 28, 2014, to the Employment Agreement, dated as of October 23, 2012, by and between the Company and D. Ashley Lee, dated September 5, 2005. (Incorporated herein by reference to Exhibit 10.2 to Form 8-K dated September 5, 2005 and filed September 9, 2005.)
10.9(c)First Amendment to Employment Agreement, dated May 4, 2006, by and between the Company and D. Ashley Lee.Steven G. Anderson. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.2014.)
10.9(d)  10.5(b)† Second Amendment, dated as of September 3, 2014, to the Employment Agreement, dated as of October 23, 2012, by and between the Company and Steven G. Anderson. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed September 9, 2014.)
  10.5(c)†Form of Change of Control Agreement (entered into with respect to Jeffrey W. Burris, David M. Fronk, and Scott B. Capps). (Incorporated herein by reference to Exhibit 10.9(a) to the Registrant’s Annual Report on 10-K for the fiscal year ended December 31, 2012.)
  10.5(d)Change of Control Agreement, by and between the Company and Gerald B. Seery,D. Ashley Lee, dated November 1, 2005.October 24, 2008. (Incorporated herein by reference to Exhibit 10.410.1 to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended September 30, 2005.8-K filed October 28, 2008.)
10.9(e)*  10.5(e)† CommissionCompensation Arrangement with Gerald B. Seery, Effective January 1, 2006.
10.9(f)Form of Employment Agreement, by and between the Company and each of Albert E. Heacox, Ph.D.CryoLife and David M. Fronk dated May 4, 2006.April 24, 2015. (Incorporated herein by reference to Exhibit 10.3Item 5.02 to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended September 30, 2006.8-K filed April 27, 2015.)
10.10  10.6 Form of Secrecy and Noncompete Agreement, by and between the Company and its Officers. (Incorporated herein by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (No. 33-56388).)
10.11*  10.7 Form of Key Employee Secrecy and Noncompete Agreement, by and between the Company and its Officers and Key Employees.
10.12Technology Acquisition Agreement between the Company and Nicholas Kowanko, Ph.D., dated March 14, 1996.Employees (Incorporated herein by reference to Exhibit 10.1410.11 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995.2006.).
10.13  10.8† Reserved.
10.14AmendedSeparation and Restated Technology AcquisitionRelease Agreement, by and between the Company and Nicholas Kowanko, Ph.D., dated March 14, 1996.Jeffrey W. Burris. (Incorporated herein by reference to Exhibit 10.1410.2 to the Registrant’s AnnualQuarterly Report on Form 10-K for the fiscal year ended December 31, 2004.10-Q filed October 28, 2014.)
10.15  10.8(a)†Separation Agreement between CryoLife and Steven G. Anderson dated April 9, 2015. (Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed April 10, 2015.)
  10.8(b)†Separation and Release Agreement between CryoLife and Bruce G. Anderson dated October 8, 2015. (Incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed October 27, 2015.)
  10.8(c)†Separation and Release Agreement - Amended between CryoLife and David M. Fronk dated October 8, 2015. (Incorporated herein by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed October 27, 2015.)
  10.9† CryoLife, Inc. Non-Employee Directors Stock Option Plan, as amended. (Incorporated herein by reference to Appendix 2 to the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 17, 1998.)

10.16  10.10 Lease Agreement between the Company and Amli Land Development—I Limited Partnership, dated April 18, 1995. (Incorporated herein by reference to Exhibit 10.2610.16 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995.2007.)

70


Exhibit
Number

Description

10.16(a)  10.10(a) First Amendment to Lease Agreement, dated April 18, 1995, between the Company and Amli Land Development—I Limited Partnership dated August 6, 1999. (Incorporated herein by reference to Exhibit 10.16(a) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999.)
10.16(b)  10.10(b) Restatement and Amendment to Funding Agreement between the Company and Amli Land Development—I Limited Partnership, dated August 6, 1999. (Incorporated herein by reference to Exhibit 10.16(b) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)
10.18*  10.10(c) Description of CryoLife, Inc. Performance-Based Bonus Plan.Amended and Restated Lease Agreement between the Company and P&L Barrett, L.P., dated May 10, 2010. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.)
10.19  10.10(d)Lease, dated October 23, 2014, by and between Roberts Boulevard, LLC, as Landlord, and CryoLife, Inc., as Tenant. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 27, 2014.)
  10.11† CryoLife, Inc. 2004 Employee Stock Incentive Plan, adopted on June 29, 2004. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)
10.20  10.11(a)† First Amendment to the CryoLife, Inc. 2004 Non-Employee DirectorsEmployee Stock OptionIncentive Plan, as amended, adopted on June 29, 2004.dated October 27, 2009. (Incorporated herein by reference to Exhibit 10.310.46 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009.)
  10.11(b)†Second Amendment to the CryoLife, Inc. 2004 Employee Stock Incentive Plan, dated May 24, 2011. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.2011.)
10.21  10.12† Form of DirectorsIncentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Non-Employee DirectorsEmployee Stock OptionIncentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended September 30, 2004.8-K filed February 25, 2008.)
10.22  10.13†Form of Non-Qualified Employee Stock Option Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed February 25, 2008.)
  10.14 Technology License Agreement between the Company and Colorado State University Research Foundation dated March 28, 1996. (Incorporated herein by reference to Exhibit 10.110.22 to the Registrant’s QuarterlyAnnual Report onForm 10-Q10-K for the quarterfiscal year ended MarchDecember 31, 1996.2007.)
10.23Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)
10.24Form of Incentive Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)
10.25  10.15† Form of Section 16 Officer Stock Option Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed February 27, 2006.)
10.26  10.16† Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 27, 2006.)
10.27Grant of Incentive Stock Option to D. Ashley Lee, dated May 4, 2006. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)
10.28Form of Purchase Agreement between CryoLife, Inc. and Piper Jaffray & Co. dated March 15, 2005. (Incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 15, 2005.)
10.29*Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.
10.30(a)*Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.
10.30(b)*Form of Director Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.
10.31*Form of Non-Employee Directors Stock Option Agreement and Grant pursuant to the Amended and Restated Non-Employee Directors Stock Option Plan.
10.32*  10.17† Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)
10.33*  10.18† Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)
10.34*Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.

71


Exhibit
Number

Description

10.35*  10.19† Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.)

10.36*Form of Grant of Non-Qualified Stock Option to Directors.
10.37*Grant of Incentive Stock Option to Stephen G. Anderson, dated May 4, 2006.
10.38  10.20 International Distribution Agreement, dated September 17, 1998, between the Company and Century Medical, Inc. (Incorporated by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.)
10.39-10.40Reserved.
10.41  10.21† CryoLife, Inc. 2002 Stock Incentive PlanPlan. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.42  10.22 Settlement and Release Agreement, dated August 2, 2002, by and between Colorado State University Research Foundation, the Company, and Dr. E. Christopher Orton. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
10.43  10.23 Settlement Agreement and Release, dated September 25, 2006, by and between CryoLife, Inc. and St. Paul Mercury Insurance Company. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.)
10.44-10.49  10.24† Reserved.Summary of Compensation Arrangements with Non-Employee Directors. (Incorporated hereby by reference to Exhibit 10.24 to the Annual Report on Form 10-K for the year ended December 31, 2015.)
14  10.25† Code of Business Conduct and Ethics.CryoLife, Inc. 2009 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 1410.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
  10.26†Form of 2013 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on 10-Q for the quarter ended March 31, 2013.)
  10.27†Form of Non-Qualified Stock Option Grant Agreement pursuant to the CryoLife, Inc. 2009 Employee Stock Incentive Plan entered into with each Named Executive Officer. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.)
  10.28+Distribution Agreement between the Company and Starch Medical, Inc., dated September 28, 2010. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 30, 2014.)
  10.28(a)First Amendment to the Distribution Agreement between the Company and Starch Medical, Inc., dated May 18, 2011. (Incorporated herein by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014.)
  10.28(b)Second Amendment to the Distribution Agreement between the Company and Starch Medical, Inc., dated September 20, 2013. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.)
  10.29+License Agreement between the Company and Starch Medical, Inc., dated September 28, 2010. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed December 30, 2014.)
  10.29(a)Indemnification Agreement between the Company and Starch Medical, Inc., dated May 21, 2013. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.)
  10.30†CryoLife, Inc. Executive Deferred Compensation Plan. (Incorporated herein by reference to Exhibit 10.52 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.2010.)
21.1*  10.31†Form of Non-Qualified Stock Option Grant Agreement pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.)
  10.32†Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2009 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.)

  10.33++Loan and Security Agreement by and between ValveXchange, Inc., and CryoLife, Inc. dated July 6, 2011. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.)
  10.33(a)First Amendment to Loan and Security Agreement by and between ValveXchange, Inc., and CryoLife, Inc. dated September 6, 2011. (Incorporated herein by reference to Exhibit 10.56(a) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011.)
  10.33(b)Second Amendment, dated July 18, 2012, to the Loan and Security Agreement by and between ValveXchange, Inc. and CryoLife, Inc. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.)
  10.34†Form of Indemnification Agreement for Non-Employee Directors and Certain Officers. (Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed February 18, 2015.)
  10.35†Form of Performance Share Agreement with Named Executive Officers. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 22, 2012.)
  10.35(a)†First Amendment, dated July 23, 2012, to the 2012 Grant Agreement to Executive Officers pursuant to the CryoLife, Inc. 2007 Executive Incentive Plan. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.)
  10.35(b)†Stock Option Grant Agreement, dated September 2, 2014, by and between CryoLife, Inc. and J. Patrick Mackin. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed October 28, 2014.)
  10.35(c)†Restricted Stock Award Agreement, dated September 2, 2014, by and between CryoLife, Inc. and J. Patrick Mackin. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed October 28, 2014.)
  10.35(d)†Form of Performance Share Agreement with Named Executive Officers pursuant to the Second Amended and Restated CryoLife, Inc. 2009 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed April 29, 2015.)
  10.35(e)†Form of Amendment to Performance Share Agreement with Named Executive Officers. (Incorporated herein by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed July 28, 2015.)
  10.36†Amended and Restated CryoLife, Inc. 2009 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 99.1 to the Registrant’s Form S-8 filed June 22, 2012.)
  10.36(a)†First Amendment, dated July 24, 2012, to the Amended and Restated CryoLife, Inc. 2009 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.)
  10.36(b)†Second Amended and Restated CryoLife Inc. 2009 Stock Incentive Plan. (Incorporated herein by reference to Appendix B to the Company’s Definitive Proxy Statement filed April 8, 2014.)
  10.37Waiver Agreement, dated May 14, 2012, by and among CryoLife, Inc. and certain of its subsidiaries, as borrowers, and General Electric Capital Corporation, as lender and administrative agent for all lenders, under the Amended and Restated Credit Agreement between the parties, dated October 28, 2011. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.)
  10.38Final Settlement Agreement, dated June 28, 2012, by and among CryoLife, Inc. and Medafor, Inc. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.)
  10.39Settlement Agreement, dated June 14, 2012, by and among CryoLife, Inc. and CardioFocus, Inc. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.)

  10.40Exclusive Supply and Distribution Agreement, dated as of March 26, 2014, by and between CryoLife, Inc. and Hancock Jaffe Laboratories, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.)
  10.41†Employment Agreement dated as of July 7, 2014, between CryoLife, Inc. and J. Patrick Mackin. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 11, 2014.)
  10.42†Form of Non-Employee Directors Restricted Stock Award Agreement pursuant to the Second Amended and Restated CryoLife, Inc. 2009 Employee Stock Incentive Plan. (Incorporated hereby by reference to Exhibit 10.42 to the Annual Report on Form 10-K for the year ended December 31, 2015.)
  10.43Commitment Letter by and among CryoLife, Inc.; Capital One, National Association; Healthcare Financial Solutions, LLC; Fifth Third Bank; and Citizens Bank, National Association, dated as of December 22, 2015. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 23, 2015.)
  10.44Third Amended and Restated Credit Agreement, dated as of January 20, 2016, by and among CryoLife, Inc., On-X Life Technologies Holdings, Inc., AuraZyme Pharmaceuticals, Inc., CryoLife International, Inc., On-X Life Technologies, Inc., Valve Special Purpose Co., LLC, the lenders from time to time party thereto and Healthcare Financial Solutions, LLC, as agent. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 25, 2016.)
  10.45Amended and Restated Guaranty and Security Agreement, dated as of January 20, 2016, by and among CryoLife, Inc., AuraZyme Pharmaceuticals, Inc., CryoLife International, Inc., On-X Life Technologies Holdings, Inc., On-X Life Technologies, Inc., Valve Special Purpose Co., LLC and each other grantor from time to time party thereto in favor of Healthcare Financial Solutions, LLC, as Administrative Agent. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed January 25, 2016.)
  10.46*†Employment Offer Letter dated December 26, 2014 between CryoLife, Inc. and Jean F. Holloway
  10.47*†Employment Agreement dated April 1, 2015 between CryoLife, Inc. and Jean F. Holloway
  10.48*†Employment Agreement dated December 9, 2013 between CryoLife, Inc. and Scott Brian Capps
  10.49*†Employment Agreement dated December 12, 2013 between CryoLife, Inc. and David Gale
  10.50*†Employment Agreement dated December 18, 2013 between CryoLife, Inc. and David Lang
  10.51*†Employment Agreement dated December 10, 2013 between CryoLife, Inc. and David Ashley Lee
  10.52*†Change of Control Agreement dated December 11, 2012 between CryoLife, Inc. and David Gale
  10.53*†Change of Control Agreement dated April 1, 2015 between CryoLife, Inc. and Jean F. Holloway
  10.54*†Change of Control Agreement dated December 2012 between CryoLife, Inc. and David P. Lang
  10.55*†Change of Control Agreement dated December 2012 between CryoLife, Inc. and D. Ashley Lee
  14.1Form of Code of Conduct, as amended (Incorporated herein by reference to Exhibit 14.1 to the Registrant’s Current Report on Form 8-K filed November 23, 2015.)
  21.1  Subsidiaries of CryoLife, Inc. (Incorporated hereby by reference to Exhibit 21.1 to the Annual Report on Form 10-K for the year ended December 31, 2015.)
23.1*  23.1  Consent of DeloitteErnst & ToucheYoung LLP. (Incorporated hereby by reference to Exhibit 23.1 to the Annual Report on Form 10-K for the year ended December 31, 2015.)
31.1*  Certification by Steven G. AndersonJ. Patrick Mackin pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2*  Certification by D. Ashley Lee pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32**  Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.


101.INSXBRL Instance Document (Incorporated hereby by reference to the Annual Report on Form 10-K for the year ended December 31, 2015.)
101.SCHXBRL Taxonomy Extension Schema Document (Incorporated hereby by reference to the Annual Report onForm 10-K for the year ended December 31, 2015.)
101.CALXBRL Taxonomy Extension Calculation Linkbase Document (Incorporated hereby by reference to the Annual Report on Form 10-K for the year ended December 31, 2015.)
101.DEFXBRL Taxonomy Extension Definition Linkbase (Incorporated hereby by reference to the Annual Report onForm 10-K for the year ended December 31, 2015.)
101.LABXBRL Taxonomy Extension Label Linkbase Document (Incorporated hereby by reference to the Annual Report on Form 10-K for the year ended December 31, 2015.)
101.PREXBRL Taxonomy Extension Presentation Linkbase Document (Incorporated hereby by reference to the Annual Report on Form 10-K for the year ended December 31, 2015.)

*Filed herewith.
**Furnished herewith.
Indicates management contract or compensatory plan or arrangement.
+The Registrant has requested confidential treatment for certain portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

72


3. B. Executive Compensation Plans and Arrangements.

1.Form of Stock Option Agreement and Grant under the Incentive Stock Option and Employee Stock Incentive Plans (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 (No. 33-56388).)

2.Employment Agreement, by and between the Company and Steven G. Anderson, dated September 5, 2005. (Incorporated herein by reference to Exhibit 10.1 to Form 8-K dated September 5, 2005 and filed September 9, 2005.)

3.Employment Agreement, by and between the Company and D. Ashley Lee, dated September 5, 2005. (Incorporated by reference to Exhibit 10.2 to Form 8-K dated September 5, 2005 and filed September 9, 2005.)

4.First Amendment to Employment Agreement, dated May 4, 2006, by and between the Company and D. Ashley Lee. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)

5.Employment Agreement, by and between the Company and Gerald B. Seery, dated November 1, 2005. (Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.)

6.*Commission Arrangement with Gerald B. Seery Effective January 1, 2006

7.Form of Employment Agreement, by and between the Company and each of Albert E. Heacox, Ph.D. and David M. Fronk, dated May 4, 2006. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.)

8.Form of Secrecy and Noncompete Agreement, by and between the Company and its Officers. (Incorporated herein by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (No. 33-56388).)

9.*Form of Key Employee Secrecy and Noncompete Agreement, by and between the Company and its Officers and Key Employees.

10.CryoLife, Inc. Non-Employee Directors Stock Option Plan, as amended. (Incorporated herein by reference to Appendix 2 to the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 17, 1998.)

11.CryoLife, Inc. 1998 Long-Term Incentive Plan. (Incorporated herein by reference to Appendix 2 to the Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 17, 1998.)

12.CryoLife, Inc. 2002 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)

13.CryoLife, Inc. 2004 Employee Stock Incentive Plan, adopted on June 29, 2004. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)

14.CryoLife, Inc. 2004 Non-Employee Directors Stock Option Plan, as amended, adopted on June 29, 2004. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.)

15.*Description of CryoLife, Inc. Performance-Based Bonus Plan.

16.Form of Directors Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Non-Employee Directors Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)

17.Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)

73


18.Form of Incentive Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)

19.Form of Section 16 Officer Stock Option Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed February 27, 2006.)

20.Form of Restricted Stock Award Agreement pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 27, 2006.)

21.Grant of Incentive Stock Option to D. Ashley Lee, dated May 4, 2006. (Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)

22.Form of Purchase Agreement between CryoLife, Inc. and Piper Jaffray & Co. dated March 15, 2005. (Incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 15, 2005.)

23.*Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.

24.*Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.

25.*Form of Director Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.

26.*Form of Non-Employee Directors Stock Option Agreement and Grant pursuant to the Amended and Restated Non-Employee Directors Stock Option Plan.

27.*Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.

28.*Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.

29.*Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.

30.*Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan.

31.*Form of Grant of Non-Qualified Stock Option to Directors.

32.*Grant of Incentive Stock Option to Stephen G. Anderson, dated May 4, 2006.

*Filed herewith.
++The Registrant has requestedbeen granted confidential treatment for certain portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

74


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CRYOLIFE, INC.

February 22, 2007

By

/s/ STEVEN G. ANDERSON

Steven G. Anderson

President, Chief Executive

Officer, and Chairman of

the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ STEVEN G. ANDERSON

Steven G. Anderson

President, Chief Executive Officer, and Chairman of the Board of Directors (Principal Executive Officer)

February 22, 2007

/s/ D. ASHLEY LEE

D. Ashley Lee

Executive Vice President, Chief Operating Officer, and Chief Financial Officer (Principal Financial Officer)

February 22, 2007

/s/ AMY D. HORTON

Amy D. Horton

Chief Accounting Officer (Principal Accounting Officer)

February 22, 2007

/s/ THOMAS F. ACKERMAN

Thomas F. Ackerman

Director

February 22, 2007

/s/ JAMES S. BENSON

James S. Benson

Director

February 22, 2007

/s/ DAN BEVEVINO

Dan Bevevino

Director

February 22, 2007

/s/ JOHN M. COOK

John M. Cook

Director

February 22, 2007

/s/ RONALD CHARLES ELKINS, M.D.

Ronald Charles Elkins, M.D.

Director

February 22, 2007

/s/ VIRGINIA C. LACY

Virginia C. Lacy

Director

February 22, 2007

/s/ RONALD D. MCCALL

Ronald D. McCall

Director

February 22, 2007

/s/ BRUCE J. VAN DYNE, M.D.

Bruce J. Van Dyne, M.D.

Director

February 22, 2007

75


Management’s Report on Internal Controls over Financial Reporting under Sarbanes-Oxley Section 404.

The management of CryoLife, Inc. and subsidiaries (“CryoLife”, “we”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. CryoLife’s internal control system was designed to provide reasonable assurance to CryoLife’s management and board of directors regarding the preparation and fair presentation of published financial statements. CryoLife’s internal control over financial reporting includes policies and procedures that:

(i)pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of CryoLife;

(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of CryoLife; and

(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of CryoLife’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

CryoLife management assessed the effectiveness of CryoLife’s internal control over financial reporting as of December 31, 2006. In making this assessment, we used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment we believe that, as of December 31, 2006, the company’s internal control over financial reporting is effective based on those criteria.

CryoLife’s independent registered public accounting firm has issued an audit report on our assessment of CryoLife’s internal control over financial reporting.

CryoLife, Inc.

February 22, 2007

 

F-160


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

CryoLife, Inc.

Kennesaw, Georgia

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls over Financial Reporting under Sarbanes-Oxley Section 404, that CryoLife, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006 of the Company and our report dated February 22, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule.

DELOITTE & TOUCHE LLP

Atlanta, Georgia

February 22, 2007

F-2


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

CryoLife, Inc.

Kennesaw, Georgia

We have audited the accompanying consolidated balance sheets of CryoLife, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CryoLife, Inc. and subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective October 1, 2005, the Company changed its method of accounting for share based payments to conform to Statement of Financial Accounting Standards No. 123R “Share Based Payment”.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

Atlanta, Georgia

February 22, 2007

F-3


CRYOLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

   December 31,
   2006  2005

ASSETS

    

Current assets:

    

Cash and cash equivalents

  $4,133  $6,631

Marketable securities, at market

   3,965   4,968

Restricted cash and securities

   571   560

Receivables:

    

Trade accounts, less allowance for doubtful accounts of $130 in 2006 and $105 in 2005

   12,553   10,153

Income taxes

   148   371

Other

   1,255   1,563
        

Total receivables

   13,956   12,087

Deferred preservation costs, net

   19,278   13,959

Inventories

   5,153   4,609

Prepaid expenses and other assets

   2,329   2,387
        

Total current assets

   49,385   45,201
        

Property and equipment:

    

Equipment

   19,911   23,227

Furniture and fixtures

   5,196   5,112

Leasehold improvements

   28,937   29,754

Construction in progress

   30   1
        

Total property and equipment

   54,074   58,094

Less accumulated depreciation and amortization

   32,684   33,719
        

Net property and equipment

   21,390   24,375

Other assets:

    

Patents, less accumulated amortization of $1,372 in 2006 and $1,691 in 2005

   4,226   4,877

Trademarks and other intangibles

   3,362   425

Other

   1,502   1,931
        

Total assets

  $79,865  $76,809
        

See accompanying notes to consolidated financial statements.

F-4


CRYOLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

   December 31, 
   2006  2005 

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

Current liabilities:

   

Accounts payable

  $2,475  $2,239 

Accrued compensation

   2,599   1,467 

Accrued procurement fees

   4,734   3,797 

Accrued expenses and other current liabilities

   7,074   8,154 

Deferred income

   1,223   424 

Deferred income taxes

   26   —   

Derivative liability

   235   114 

Line of credit

   4,507   4,530 

Current maturities of capital lease obligations

   40   554 
         

Total current liabilities

   22,913   21,279 
         

Capital lease obligations, less current maturities

   124   —   

Deferred income taxes

   200   —   

Other

   4,540   4,909 
         

Total liabilities

   27,777   26,188 
         

Shareholders’ equity:

   

Preferred stock $.01 par value per share; authorized 5,000 shares Series A junior participating preferred stock; 2,000 shares authorized; no shares issued

   —     —   

Convertible preferred stock; 460 shares authorized; 325 issued and outstanding in 2006 and 2005

   3   3 

Common stock $.01 par value per share; authorized 75,000 shares; issued 25,813 shares in 2006 and 25,582 shares in 2005

   258   256 

Additional paid-in capital

   115,678   113,507 

Retained deficit

   (59,177)  (58,569)

Deferred compensation

   (73)  —   

Accumulated other comprehensive income

   160   123 

Treasury stock at cost; 906 shares in 2006 and 892 shares in 2005

   (4,761)  (4,699)
         

Total shareholders’ equity

   52,088   50,621 
         

Total liabilities and shareholders’ equity

  $79,865  $76,809 
         

See accompanying notes to consolidated financial statements.

F-5


CRYOLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

   Year Ended December 31, 
   2006  2005  2004 

Revenues:

    

Products

  $41,037  $38,932  $36,637 

Human tissue preservation services

   40,078   30,307   25,676 

Other

   196   43   71 
             

Total revenues

   81,311   69,282   62,384 
             

Costs and expenses:

    

Products

   7,463   8,065   7,818 

Human tissue preservation services (including write-downs of $4,537 in 2006, $1,797 in 2005, and $6,905 in 2004)

   29,958   24,357   29,807 

General, administrative, and marketing

   41,545   53,225   42,640 

Gain on exit activities

   (2,620)  —     —   

Research and development

   3,547   3,724   3,938 

Interest expense

   657   346   196 

Interest income

   (409)  (531)  (262)

Change in valuation of derivative

   121   (140)  —   

Other expense, net

   399   199   13 
             

Total costs and expenses

   80,661   89,245   84,150 
             

Income (loss) before income taxes

   650   (19,963)  (21,766)

Income tax expense (benefit)

   285   (428)  (3,017)
             

Net income (loss)

  $365  $(19,535) $(18,749)
             

Effect of preferred stock dividends

   (973)  (777)  —   
             

Net loss applicable to common shares

  $(608) $(20,312) $(18,749)
             

Loss per common share:

    

Basic

  $(0.02) $(0.85) $(0.81)
             

Diluted

  $(0.02) $(0.85) $(0.81)
             

Weighted average common shares outstanding:

    

Basic

   24,829   23,959   23,043 

Diluted

   24,829   23,959   23,043 

See accompanying notes to consolidated financial statements.

F-6


CRYOLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

   Year Ended December 31, 
   2006  2005  2004 

Net cash flows from operating activities:

    

Net income (loss)

  $365  $(19,535) $(18,749)

Adjustments to reconcile net income (loss) to net cash from operating activities:

    

Gain on sale of marketable equity securities

   —     (3)  —   

Loss on disposal of assets

   426   108   30 

Depreciation of property and equipment

   4,560   4,759   5,202 

Amortization

   284   277   281 

Provision for doubtful accounts

   65   57   53 

Write-down of deferred preservation costs and inventories

   1,758   1,797   7,105 

Net non-cash gain on exit activities

   (31)  —     —   

Deferred income taxes

   226   —     —   

Non-cash compensation

   1,620   322   358 

Change in valuation of derivative

   121   (140)  —   

Other non-cash adjustments to income

   (182)  1,771   10 

Changes in operating assets and liabilities:

    

Trade and other receivables

   (2,431)  (1,854)  (2,159)

Income taxes

   213   1,024   665 

Deferred preservation costs

   (9,800)  (6,934)  (6,916)

Inventories

   (600)  158   (517)

Prepaid expenses and other assets

   397   27   (2,060)

Accounts payable

   155   (712)  342 

Accrued expenses and other liabilities

   1,783   361   (3,256)
             

Net cash flows used in operating activities

   (1,071)  (18,517)  (19,611)
             

Net cash flows from investing activities:

    

Capital expenditures

   (1,642)  (989)  (950)

Net proceeds from sale of assets

   13   12   26 

Purchases of marketable securities

   (17,385)  (21,690)  (563)

Sales and maturities of marketable securities

   18,562   20,841   2,000 

Other

   (105)  (208)  (56)
             

Net cash flows (used in) provided by investing activities

   (557)  (2,034)  457 
             

Net cash flows from financing activities:

    

Principal payments of debt

   (553)  (317)  —   

Proceeds from debt issuance

   710   4,847   —   

Principal payments on obligations under capital leases

   (570)  (741)  (717)

Proceeds from financing of insurance policies

   2,349   2,482   3,385 

Principal payments on short-term note payable

   (2,349)  (2,482)  (3,385)

Proceeds from exercise of options and issuance of stock

   468   372   443 

Payment of preferred stock dividend and make whole payments

   (973)  (533)  —   

Proceeds from equity offering

   —     19,098   19,265 

Purchase of treasury stock

   (50)  —     (54)
             

Net cash flows (used in) provided by financing activities

   (968)  22,726   18,937 
             

(Decrease) increase in cash

   (2,596)  2,175   (217)
             

Effect of exchange rate changes on cash

   98   (257)  33 

Cash and cash equivalents, beginning of year

   6,631   4,713   4,897 
             

Cash and cash equivalents, end of year

  $4,133  $6,631  $4,713 
             

See accompanying notes to consolidated financial statements.

F-7


CRYOLIFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

  

Preferred

Stock

  

Common

Stock

 

Additional

Paid In
Capital

  Retained
Deficit
  Deferred
Compensation
  

Accumulated

Other

Comprehensive
Income

  

Treasury

Stock

  

Total

Shareholders’
Equity

 
  Shares  Amount  Shares  Amount             Shares  Amount    

Balance at December 31, 2003

 —    $—    21,130  $211 $74,460  $(19,508) $(9) $365  (1,371) $(7,181) $48,338 
                                        

Net loss

 —     —    —     —    —     (18,749)  —     —    —     —     (18,749)

Other comprehensive loss, net of taxes

 —     —    —     —    —     —     —     (4) —     —     (4)
              

Comprehensive loss

            (18,753)
              

Equity offering

 —     —    3,444   34  19,231   —     —     —    —     —     19,265 

Equity Compensation

 —     —    84   1  579   —     (222)  —    (7)  (54)  304 

Exercise of options

 —     —    72   1  221   —     —     —    (12)  (81)  141 

Employee stock purchase plan

 —     —    75   1  355   —     —     —    —     —     356 

Amortization of deferred compensation

 —     —    —     —    —     —     9   —    —     —     9 
                                        

Balance at December 31, 2004

 —     —    24,805  $248 $94,846  $(38,257) $(222) $361  (1,390) $(7,316) $49,660 
                                        

Net loss

 —     —    —     —    —     (19,535)  —     —    —     —     (19,535)

Other comprehensive loss

 —     —    —     —    —     —     —     (238) —     —     (238)
              

Comprehensive loss

            (19,773)
              

Equity offering

 417   4  —     —    18,054   —     —     —    —     —     18,058 

Conversion of stock and dividend make whole payments

 (92)  (1) 694   7  779   —     —     —    —��    —     785 

Dividend payments

 —     —    —     —    —     (777)  —     —    —     —     (777)

Exercise of options

 —     —    36   —    111   —     —     —    (2)  (17)  94 

Equity compensation

 —     —    (3)  —    100   —     222   —    —     —     322 

Employee stock purchase plan

 —     —    50   1  278   —     —     —    —     —     279 

Payment of treasury shares

 —     —    —     —    (661)  —     —     —    500   2,634   1,973 
                                        

Balance at December 31, 2005

 325  $3  25,582  $256 $113,507  $(58,569) $—    $123  (892) $(4,699) $50,621 
                                        

Net income

 —     —    —     —    —     365   —     —    —     —     365 

Other comprehensive income

 —     —    —     —    —     —     —     37  —     —     37 
              

Comprehensive income

            402 
              

Dividend payments

 —     —    —     —    —     (973)  —     —    —     —     (973)

Exercise of options

 —     —    101   1  227   —     —     —    (2)  (12)  216 

Equity compensation

 —     —    54   —    1,693   —     (73)  —    (12)  (50)  1,570 

Employee stock purchase plan

 —     —    76   1  251   —     —     —    —     —     252 
                                        

Balance at December 31, 2006

 325  $3  25,813  $258 $115,678  $(59,177) $(73) $160  (906) $(4,761) $52,088 
                                        

See accompanying notes to consolidated financial statements.

F-8


CRYOLIFE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Nature of Business

CryoLife, Inc. (“CryoLife” or the “Company”), incorporated January 19, 1984 in Florida, develops and commercializes implantable medical devices and preserves and distributes human tissues for cardiovascular and vascular transplant applications. The Company’s biomaterials and implantable devices include BioGlue® Surgical Adhesive (“BioGlue”), porcine heart valves, and vascular grafts of bovine tissue processed using the Company’s proprietary SynerGraft® technology. Historically, the Company preserved and distributed human orthopaedic tissue for transplant applications. CryoLife ceased processing human orthopaedic tissue effective January 1, 2007 but will continue to distribute its existing orthopaedic tissues through June 30, 2008.

CryoLife is authorized to distribute BioGlue throughout the United States and in more than 60 other countries for designated applications. In the U.S. BioGlue is U.S. Food and Drug Administration (“FDA”) approved as an adjunct to sutures and staples for use in adult patients in open surgical repair of large vessels. CryoLife distributes BioGlue under Conformité Européene (“CE”) Mark product certification in the European Economic Area (“EEA”) for soft tissue repair procedures (which includes cardiovascular, pulmonary, and additional soft tissue repair procedures). CryoLife has also received approval and distributes BioGlue for soft tissue repairs in Canada. Additional marketing approvals have been granted for specified applications in Australia and several other countries in Central and South America, and Asia. CryoLife distributes preserved human cardiovascular, vascular, and orthopaedic tissue to implanting institutions throughout the U.S., Canada, and Europe. CryoLife also distributes its SynerGraft processed bovine vascular graft and a porcine heart valve, the CryoLife O’Brien® aortic heart valve, in Europe, the Middle East, and Africa.

The Company believes that its existing cash, cash equivalents, marketable securities, and availability under the Credit Agreement, as defined in Note 6, will enable the Company to meet its liquidity needs through at least December 31, 2007.

The Company could experience an adverse impact on revenues and cash flows during 2007 from decreases in orthopaedic revenue as a result of the exchange and service agreement with Regeneration Technologies, Inc., and certain of its affiliates (collectively “RTI”), (the “RTI Agreement”), which will need to be offset by increases in cardiovascular and vascular revenues derived as a result of the RTI Agreement. See Note 3 for a discussion of the RTI Agreement.

The Company believes the following should continue to have a favorable impact on cash flow from operations during 2007, although there can be no assurance that these events will occur as and when currently anticipated:

Expected increases in BioGlue revenues over levels experienced in 2006 due to increases in BioGlue list prices implemented in July 2006 and January 2007 and anticipated volume increases,

Expected increases in total preservation service revenues over levels experienced in 2006 due to fee increases for certain tissues implemented in July 2006 and January 2007, to reflect the higher cost of processing these tissues, and anticipated volume increases for cardiovascular and vascular tissues,

Anticipated net benefits of the RTI Agreement in reducing general, administrative, and marketing costs related to orthopaedic tissues, and

Anticipated decreases in cash payments related to the defense and resolution of lawsuits and claims from the levels seen in 2003 through 2006.

However, the Company’s long term liquidity and capital requirements will depend upon numerous factors, including:

The success of BioGlue and other products using related technology,

The Company’s ability to increase the level of tissue procurement and demand for its tissue preservation services,

The Company’s ability to maintain sufficient margins on its tissue preservation services,

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The Company’s spending levels on its research and development activities, including research studies, to develop and support its service and product pipeline,

The timing and cost of resolving product liability lawsuits and other claims (as discussed in Note 10),

The successful transition of cardiovascular and vascular tissue procurement previously received by RTI to the Company (as discussed in Note 3),

To a lesser degree, the Company’s success at resolving the issues with the FDA regarding processing of human tissue using the SynerGraft technology (as discussed in Note 2), and

The Company’s success in implementing its recently identified strategic initiatives.

If the Company is unable to address these issues and continues to experience negative cash flows, the Company anticipates that it may require additional financing or seek to raise additional funds through bank facilities, debt or equity offerings, or other sources of capital to meet liquidity and capital requirements beyond December 31, 2007. Additional funds may not be available when needed or on terms acceptable to the Company, which could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.

Certain Reclassifications of Prior Year Amounts

Certain prior year amounts have been reclassified to conform to current year presentation. In 2006 the Company determined that its presentation of payments on notes payable to finance insurance policy premiums in the operating section of the cash flow statement are more appropriately classified as a change in operating assets in the operating cash outflows and both a proceed and principal payment in the financing cash outflows. Therefore, a total of $2.5 million and $3.4 million was reclassified from the financing section of the cash flow statement to the operating section of the cash flow statement as of December 31, 2005 and 2004, respectively. The Company had previously disclosed the existence and the nature of these financing agreements in the Notes to Consolidated Financial Statements included in the CryoLife Form 10-K for the year ended December 31, 2005.

In 2006 the Company revised its presentation of income tax expense (benefit) by showing a separate disclosure for foreign current and foreign deferred taxes. In addition the Company revised its disclosures of temporary tax differences to show subtotals for total deferred tax assets and total deferred tax liabilities. As a result of these changes, the Company revised the presentation of comparative amounts in 2005 and 2004 to conform with the new presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances are eliminated.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates and assumptions are used when accounting for depreciation, allowance for doubtful accounts, deferred preservation costs, valuation of long-lived tangible and intangible assets, commitments and contingencies, including product liability claims, claims incurred but not reported, and amounts recoverable from insurance companies, cost of share based payments and the related income statement expense or pro-forma expense, and certain accrued expenses, including accrued procurement fees, income taxes, and derivative instruments.

Revenue Recognition

The Company recognizes revenue in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB 104”), which provides guidance on applying generally accepted accounting principles to revenue recognition issues. Revenues for human tissue preservation services are recognized when services are completed and tissue is shipped to the customer. Revenues for products are recognized at the time the product is

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shipped, at which time title passes to the customer. There are no further performance obligations. The Company assesses the likelihood of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. Revenues from research grants are recognized in the period the associated costs are incurred. Revenues from upfront licensing agreements are recognized ratably over the period the Company expects to fulfill its obligations and complete the earnings process.

Shipping and Handling Charges

Fees charged to customers for shipping and handling of preserved tissues and products are included in human tissue preservation service revenues and product revenues, respectively. The costs for shipping and handling of preserved human tissues and products are included as a component of cost of human tissue preservation services and cost of products, respectively.

Cash and Cash Equivalents

Cash equivalents consist primarily of highly liquid investments with insignificant interest rate risk and maturity dates of 90 days or less at the time of acquisition. The carrying value of cash equivalents approximates fair value.

Supplemental disclosures of cash flow information for the years ended December 31 (in thousands):

   2006  2005  2004

Cash paid during the year for:

      

Interest

  $635  $276  $127

Income taxes

   34   216   200

Non-cash investing and financing activities:

      

Non-cash acquisition of intangibles

  $2,909  $—    $—  

Assets acquired under capital leases

   180   —     77

Payment of legal settlement in stock

   —     1,973   —  

Payment of make whole payments in common stock

   —     786   —  

Purchase of property and equipment in accounts payable and accrued expenses

   —     21   70

Marketable Securities

The Company maintains cash equivalents and investments in several large, well-capitalized financial institutions, and the Company’s policy disallows investment in any securities rated less than “investment-grade” by national rating services. Management determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such designations quarterly.

Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Trading securities are securities that are acquired principally for the purpose of generating a profit from short-term fluctuations in price. Trading securities are stated at their fair values, with the realized and unrealized gains and losses, interest, and dividends included in investment income. Debt securities not classified as held-to-maturity or trading and marketable equity securities not classified as trading are classified as available-for-sale. Available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of applicable taxes, reported in a separate component of shareholders’ equity. Interest, dividends, realized gains and losses, and declines in value judged to be other than temporary are included in investment income (loss). The cost of securities sold is based on the specific identification method.

As of December 31, 2006 and 2005 $4.0 million and $5.0 million, respectively, of marketable securities were designated as available-for-sale, and $571,000 and $560,000, respectively, of marketable securities were designated as held-to-maturity. These securities were designated as held-to-maturity due to a contractual commitment to pledge and hold the securities as collateral under one of the Company’s product liability insurance policies; accordingly, such securities are reported as restricted securities on the December 31, 2006 and 2005 Consolidated Balance Sheets.

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Deferred Preservation Costs

By federal law, human tissues cannot be bought or sold. Therefore, the tissues the Company preserves and further processes cannot be held as inventory. Tissue is procured from deceased human donors by organ and tissue procurement agencies, which consign the tissue to the Company for processing, preservation, and distribution. Preservation costs consist primarily of direct labor and materials (including laboratory expenses, tissue procurement fees, freight-in charges, and fringe benefits) and indirect costs (including allocations of costs from departments that support processing activities and facility allocations). Although the Company cannot own human tissue, the preservation process is a manufacturing process that is accounted for in accordance with Accounting Research Bulletin No. 43 (“ARB 43”) Chapter 4, Inventory Pricing. Preservation costs are stated at the lower of cost or market on a first-in, first-out basis and are deferred until revenue is recognized upon shipment of the tissue to the implanting facilities.

The calculation of deferred preservation costs includes a high degree of judgment and complexity. The costs included in deferred preservation costs contain several estimates due to the timing differences between the occurrence of the cost and receipt of final bills for services. Costs that contain estimates include tissue procurement fees, which are estimated based on the Company’s contracts with independent procurement agencies, and freight-in charges, which are estimated based on the Company’s prior experiences with these charges. These costs are adjusted for differences between estimated and actual fees when invoices for these services are received. Management believes that its estimates approximate the actual costs of these services, but estimates could differ from actual costs. Total deferred preservation costs are then allocated among the different tissues processed during the period based on specific cost drivers such as the number of donors and the number of tissues processed. At each balance sheet date a portion of the deferred preservation costs relates to tissues currently in active processing or held in quarantine pending release to implantable status. The Company applies a yield estimate to all tissues in process and in quarantine to estimate the portion of tissues that will ultimately become implantable. Management determines this estimate of quarantine yields based on its experience in prior periods and reevaluates this estimate periodically. Due to the nature of this estimate and the length of the processing times experienced by the Company, actual yields could differ from the Company’s estimates. A significant change in quarantine yields could materially impact the amount of deferred preservation costs on the Company’s Consolidated Balance Sheet and the cost of preservation services, including the lower of cost or market write-down, described below, on the Company’s Consolidated Statements of Operations.

The Company regularly evaluates its deferred preservation costs to determine if the costs are appropriately recorded at the lower of cost or market value and to determine if there are any impairments to the book value of the Company’s deferred preservation costs. The Company recorded a write-down of $2.8 million in the year ended December 31, 2006 due to the impairment of certain orthopaedic tissues and processing materials as a result of the RTI Agreement discussed in Note 3 below. This write-down is based on the Company’s estimate of the tissues that will be shipped during the 18-month period subsequent to December 31, 2006 in which the Company can continue to distribute its existing orthopaedic tissues. The amount of tissues shipped during that period could differ significantly from this initial estimate resulting in higher margins on shipments of orthopaedic tissues during the 18-month period or additional write-downs in future periods.

The Company also recorded $1.2 million in the year ended December 31, 2006 and $1.8 million in the year ended December 31, 2005 as an increase to cost of preservation services to write-down the value of certain deferred tissue preservation costs that exceeded market value. The amount of these write-downs are primarily due to excess current period tissue processing costs that exceeded market value based on recent average service fees. Actual results may differ from these estimates.

The Company regularly evaluates its deferred preservation costs to determine if an impairment in the value of the deferred preservation costs is required when the value of these tissues is not expected to be fully recoverable. A write-down of $588,000 was recorded for the year ended December 31, 2006 due to the impairment of certain orthopaedic tissues.

As of December 31, 2006 deferred preservation costs consisted of $4.7 million for allograft heart valve tissues, $1.0 million for non-valved cardiac tissues, $11.3 million for vascular tissues, and $2.3 million for orthopaedic tissues. As of December 31, 2005 deferred preservation costs consisted of $3.4 million for allograft heart valve tissues, $566,000 for non-valved cardiac tissues, $6.0 million for vascular tissues, and $4.0 million for orthopaedic tissues.

Inventories

Inventories are comprised of implantable surgical adhesives and bioprosthetic products and are valued at the lower of cost (first-in, first-out) or market.

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The Company was required to adopt Statements of Financial Accounting Standards (“SFAS”) 151 “Inventory Costs” (“SFAS 151”) effective January 1, 2006. SFAS 151 requires current period expensing of items such as idle facility expense, excessive spoilage, double freight, and rehandling costs and requires allocation of fixed production overheads to be based on the normal capacity of the production facilities. The adoption of SFAS 151 did not have a material impact on the Company’s results of operations and financial position.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets, generally three to ten years, on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the lease term or the estimated useful lives of the assets, whichever is shorter.

Long-Lived Assets

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), requires the write-down of a long-lived asset to be held and used if the carrying value of the asset or the asset group to which the asset belongs is not recoverable. The carrying value of the asset or asset group is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset or asset group. In applying SFAS 144 the Company defined the specific asset groups used to perform the cash flow analysis. The Company defined the asset groups at the lowest level possible, by identifying the cash flows from groups of assets that could be segregated from the cash flows of other assets and liabilities. Using this methodology the Company determined that its asset groups consisted of the long-lived assets related to the Company’s two reporting segments. As the Company does not segregate assets by segment, the Company allocated assets to the two reporting segments based on factors including facility space and revenues. The undiscounted future cash flows related to these asset groups exceeded their carrying values as of December 31, 2006 and 2005, therefore, management concluded that there was not an impairment of the Company’s long-lived intangible assets and tangible assets related to the tissue preservation business or medical device business. However, depending on the Company’s ability to rebuild demand for its tissue preservation services and the future effects of events surrounding the FDA Order as defined in Note 3 below, these assets may become impaired. Management will continue to evaluate the recoverability of these assets in accordance with SFAS 144.

Intangible Assets

SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), requires that goodwill resulting from business acquisitions and other intangible assets be subject to periodic impairment testing. The Company’s intangible assets consist of patents and trademarks. In addition, during 2006, the Company acquired customer lists, non-compete agreements, procurement contracts and access to the procurement of cardiovascular and vascular human tissues previously received by RTI as a result of the RTI Agreement discussed in Note 3 below. The Company amortizes its definite lived intangible assets over their expected useful lives using the straight-line method. As of December 31, 2006 and 2005 the Company did not believe that an impairment existed related to its intangible assets.

As of December 31, 2006 and 2005 gross values, accumulated amortization, and amortization periods of the Company’s definite lived intangible assets are as follows (in thousands):

   

Gross

Carrying
Value

  Accumulated
Amortization
  Amortization
Period

December 31, 2006

      

Patents

  $5,598  $1,372  17 Years

Customer lists

   515   —    3 Years

Non-compete agreement

   381   —    10 Years
December 31, 2005      

Patents

  $6,568  $1,691  17 Years

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As of December 31, 2006 and 2005 the carrying values of the Company’s indefinite lived intangible assets are as follows (in thousands):

   2006  2005

Trademarks

  $453  $425

Procurement contracts

   2,013   —  

As of December 31, 2006 scheduled amortization of intangible assets for the next five years is as follows (in thousands):

   2007  2008  2009  2010  2011  Total

Amortization expense

  $498  $498  $496  $321  $315  $2,128

Accrued Procurement Fees

Tissue is procured from deceased human donors by organ and tissue procurement agencies (“Agencies”), which consign the tissue to the Company for processing, preservation, and distribution. The Company reimburses the Agencies for their costs to recover the tissue and passes on these costs to the customer when the tissue is shipped and the service is complete. The Company accrues the estimated procurement fees due to the Agencies at the time the tissue is received based on contractual agreements between the Company and the Agencies.

Product Liability Claims

In the normal course of business as a medical device and services company, the Company has product liability complaints filed against it. The Company maintains claims-made insurance policies to mitigate its financial exposure to product liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. The Company periodically evaluates its exposure to unreported product liability claims, and records accruals as necessary for the estimated cost of unreported claims related to services performed and products used. The Company retained an independent actuarial firm to perform revised estimates of the unreported claims, the latest of which was performed in January 2007 as of December 31, 2006. The independent firm estimated the unreported product loss liability using a frequency-severity approach, whereby, projected losses were calculated by multiplying the estimated number of claims by the estimated average cost per claim. The estimated claims were calculated based on the reported claim development method and the Bornhuetter-Ferguson method using a blend of the Company’s historical claim experience and industry data. The estimated cost per claim was calculated using a lognormal claims model blending the Company’s historical average cost per claim with industry claims data. The Company records accruals for estimated costs for unreported product liability claims based on the information included in the actuarial valuation.

In addition to the Company’s evaluation of its exposure related to unreported product liability claims, the Company periodically evaluates its exposure related to settled but unpaid claims and pending product liability claims based on settlement negotiations to date, advice from counsel, and historical claim settlements. The Company then records accruals for settled but unpaid claims and pending product liability claims based on its analysis.

Deferred Income Taxes

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when it is more likely than not that the full value of a deferred tax asset will not be recovered.

Earnings (Loss) Per Common Share

Earnings (loss) per common share is computed in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”) on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options, computed using the treasury stock method, and the dilutive effect of outstanding convertible preferred stock, computed using the if converted method.

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Stock-Based Compensation

The Company has stock option and stock incentive plans that provide for grants to employees and directors of shares and options to purchase shares of the Company’s common stock at exercise prices generally equal to the fair values of such stock at the dates of grant.

The Company early adopted SFAS 123 Revised “Share-Based Payment” (“SFAS 123R”) on October 1, 2005. The Company’s decision to early adopt SFAS 123R was pursuant to a shareholder derivative action settlement, as discussed in Note 10. SFAS 123R requires companies to recognize the cost of all share-based payments in the financial statements using a fair-value based measurement method. The Company adopted SFAS 123R using the modified version of prospective application, as defined in SFAS 123R.

In periods prior to October 1, 2005 the Company elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“APB 25”) in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant, no compensation expense was recognized. In accordance with APB 25 the compensation recorded for employee stock grants was equal to the value of the grant on the measurement date, the date of the grant, as determined by the closing price of the Company’s common stock on that date. Some employee stock grants vest in future periods based on a requirement of continued service to the Company. For these stock grants the amount of the stock grant was recorded as deferred compensation in the equity section of the Company’s Consolidated Balance Sheets, and was expensed over the vesting period.

Pro forma information regarding net income (loss) and income (loss) per common share is required by SFAS 123R, which requires that the information be determined as if the Company has accounted for its employee stock options granted under the fair value method of that statement. The fair values for the options accounted for under APB 25 were estimated at the dates of grant using a Black-Scholes option-pricing model. For purposes of pro forma disclosures, the estimated fair values of the options were amortized to expense over the options’ vesting periods.

Translation of Foreign Currencies

Assets and liabilities of the Company denominated in foreign currencies are translated at the exchange rate in effect as of the balance sheet date. All revenue and expense accounts are translated as transactions occur at exchange rates in effect at the time of each transaction. Translation adjustments are recorded as a separate component of other comprehensive income in shareholders’ equity.

Derivative Instruments

In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), the Company is required to separate and account for the Dividend Make-Whole Payment feature, as defined in Note 8, of its 6% convertible preferred stock as an embedded derivative. The Company determines the fair value of its derivative and records the value as a current liability on the Company’s Consolidated Balance Sheets. Changes in the fair value of the derivative are recognized in the as a non-operating income (expense) on the Company’s Consolidated Statements of Operations.

Fair Values of Financial Instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” requires the Company to disclose estimated fair values for its financial instruments. The carrying amounts of receivables and accounts payable approximate their fair values due to the short-term maturity of these instruments. The carrying value of the Company’s other financial instruments, including the Company’s debt and derivative liabilities, approximated fair value at December 31, 2006 and 2005.

New Accounting Pronouncements

The Company will be required to adopt Financial Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”) for its year beginning January 1, 2007. FIN 48 establishes a threshold for recognizing tax benefits if they are “more-likely-than-not” to

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be upheld upon review by the appropriate taxing authority and the requirement that companies recognize the maximum amount of tax benefit that has a “greater than 50 percent likelihood” of ultimately being realized. The cumulative effect of adoption of this interpretation will be reported as an adjustment to the opening balance of retained earnings. The Company does not anticipate that the adoption of FIN 48 will have a material affect on its results of operations or financial position, although the Company is continuing to evaluate the full impact of the adoption of FIN 48.

The Company will be required to adopt SFAS No. 157 “Fair Value Measurements” (“SFAS 157”) for the fiscal year beginning January 1, 2008. SFAS 157 provides a single definition of fair value and a hierarchical framework for measuring it, as well as establishing additional disclosure requirements about the use of fair value to measure assets and liabilities. The Company is in the process of evaluating the impact of SFAS 157 on its results of operations and financial position.

The Company was required to adopt SAB No. 108, codified as SAB Topic 1.N, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”) for the year ended December 31, 2006. SAB 108 requires the use of both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. Adjustment to the financial statements is required if either approach results in quantifying a misstatement that is material. The adoption of SAB 108 did not have a material impact on the Company’s results of operations and financial position.

2. FDA Order on Human Tissue Preservation and Other FDA Correspondence and Notices

FDA Order

On August 13, 2002 the Company received an order from the Atlanta district office of the FDA regarding the non-valved cardiac, vascular, and orthopaedic tissues processed by the Company since October 3, 2001 (the “FDA Order”). Pursuant to the FDA Order, the Company placed non-valved cardiac, vascular, and orthopaedic tissue subject to the FDA Order (i.e. processed since October 3, 2001) on quality assurance quarantine and recalled the portion of those tissues that had been distributed but not implanted. In addition the Company ceased processing non-valved cardiac, vascular, and orthopaedic tissues.

The FDA allowed non-valved cardiac and vascular tissues covered by the recall to be distributed beginning in late September 2002, subject to specified conditions. The Company changed its processing procedures and took other actions intended to address the FDA’s concerns, and now processes non-valved cardiac and vascular tissues. The Company processed orthopaedic tissues through December 31, 2006 when it ceased processing orthopaedic tissue pursuant to the RTI Agreement discussed below in Note 3.

See Note 10 for a discussion of certain material legal proceedings relating to the FDA Order and other matters.

Other FDA Correspondence and Notices

July 2005 483

An FDA Form 483 Notice of Observations (“483”) was issued in August 2005 in connection with the FDA inspections of the Company’s facilities in July 2005 (“July 2005 483”). The Company responded to the July 2005 483 in August 2005, in September 2005, and in October 2005. In April 2006 the FDA responded on the adequacy of the Company’s responses. The Company responded to the FDA in June 2006. In response to the July 2005 483 the Company has implemented new systems and procedures and revised existing systems and procedures. The FDA may require the Company to implement additional corrective actions, perform additional validation testing, or supply additional information related to the inspections, and has the authority to take other actions, which may be more burdensome. The Company has cooperated and will continue to cooperate with the FDA to review process improvements and address any outstanding observations.

SynerGraft

On February 20, 2003 the Company received a letter from the FDA stating that a 510(k) premarket notification should be filed for the Company’s SynerGraft processed human cardiac tissues (“CryoValve SG”) and that premarket approval marketing authorization should be obtained for the Company’s SynerGraft processed human vascular tissues (“CryoVein SG”) when marketed or labeled as an arteriovenous (“A-V”) access graft. The agency’s position is that use of the SynerGraft technology in the processing of allograft heart valves represents a modification to the Company’s legally marketed CryoValve allograft and that vascular allografts labeled for use as A-V access grafts are medical devices that require premarket approval.

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On November 3, 2003 the Company filed a 510(k) premarket notification with the FDA for the CryoValve SG. On February 4, 2004 the Company received a letter from the FDA requesting additional information. On August 24, 2004 the Company submitted an amendment to its original 510(k) submission providing clarification and additional information. The FDA requested further additional information in November 2004. On June 8, 2005 CryoLife responded to some of these additional requests. CryoLife also has initiated an appeal of other requests through administrative procedures. The FDA requested further additional information in January 2006. Since March 2006 the Company has had discussions with the FDA to address the outstanding requests for additional information and seek clearance for the CryoValve SG pulmonary valve. On July 21, 2006 the Company submitted an amendment to its 510(k) application addressing information requested by the FDA. The Company has undertaken further clinical and preclinical evaluations in response to requests by the FDA. These evaluations were submitted to the FDA in an additional 510(k) amendment on February 20, 2007. The FDA may still require that additional studies be undertaken. Clearance of the 510(k) premarket notification with the FDA will be required before the Company can resume distribution of SynerGraft processed CryoValve SG.

On December 8, 2003 the Company received a letter from the FDA stating that it was the agency’s position that certain additional cardiovascular tissues processed with the SynerGraft technology should be regulated as medical devices. On September 14, 2004 the Company met with the FDA to discuss the data to be used to support a formal Request for Designation (“RFD”) filing for SynerGraft processed non-valved cardiac and vascular tissue, including the CryoVein SG. An RFD submission establishes the regulatory status of the tissue. The Company submitted the RFD on October 5, 2004. The FDA affirmed its original decision in letters received in December 2004. That decision was subject to an administrative appeal. On October 20, 2005 CryoLife was informed that the FDA had denied the appeal and that CryoLife will be unable to distribute CryoVein tissues with the SynerGraft technology until further submissions and FDA approvals are granted. The Company is evaluating whether it will file and seek FDA approvals for CryoVein SG or discontinue the CryoVein SG.

As a result of these FDA communications, in 2003 the Company suspended the use of the SynerGraft technology in the processing of allograft tissue and the distribution of tissues on hand previously processed with the SynerGraft technology until the regulatory issues associated with these tissues are resolved. Additionally, the Company discontinued labeling its vascular grafts for use as A-V access grafts. Until such time as the issues surrounding SynerGraft are resolved, the Company is employing its traditional processing methods on these tissues. As of December 31, 2006 the Company had no deferred preservation costs related to SynerGraft processed tissues on its Consolidated Balance Sheets.

3. Exchange and Service Agreement

On December 19, 2006 the Company announced that it had entered into the RTI Agreement, an exchange and service agreement with Regeneration Technologies, Inc., and certain of its affiliates (collectively, “RTI”), respecting procurement, processing, and distribution activities for cardiovascular and vascular tissue processed and distributed by RTI and orthopaedic tissue for the knee processed and distributed by CryoLife. According to the RTI Agreement, CryoLife ceased accepting for processing donated human orthopaedic tissue commencing January 1, 2007 and will work to transition existing arrangements for recovery of human orthopaedic tissue to RTI. Likewise, on January 1, 2007 RTI ceased accepting donated human cardiovascular and vascular tissues for processing and will work to transition its arrangements for recovery of these tissues to CryoLife. Certain physical assets relating to the tissues that are the subject of the agreement may also be transferred between the parties. No cash was exchanged in the transaction. CryoLife will continue to distribute its existing orthopaedic tissue inventory, and RTI will continue to distribute its existing cardiovascular and vascular tissue inventory, through June 30, 2008. After that date CryoLife will become entitled to distribute RTI’s remaining cardiovascular and vascular tissue inventory, and RTI will become entitled to distribute CryoLife’s remaining orthopaedic tissue inventory, for a fee. Under the RTI Agreement, from July 1, 2008 through December 31, 2016, except as set forth above, CryoLife has agreed not to market or solicit orders for certain human orthopaedic tissues and RTI has agreed not to market or solicit orders for human cardiac and vascular tissues. The agreement also provides for a non-exclusive license of technology from CryoLife to RTI, and contains customary provisions regarding indemnification and confidentiality.

As a result of the RTI Agreement, the Company recorded a net $159,000 loss, which is composed of a write-down of $2.8 million in cost of human tissue preservation services and a $2.6 million gain on exit activities included in general, administrative, and marketing expense and disclosed on the face of the Company’s Consolidated Statement of Operations.

The $2.8 million write-down was due to the impairment of certain orthopaedic tissues and processing materials. The write-down of deferred tissue preservation costs is based on an estimate of the tissues that will be shipped during the 18-month period subsequent to December 31, 2006 in which the Company can continue to distribute its existing orthopaedic tissues. The amount of tissues shipped during that period could differ significantly from this initial estimate resulting in higher margins on shipments of orthopaedic

F-17


tissues during the 18-month period or additional write-downs in future periods. The write-down of processing materials was based on the book value of certain raw materials that would not be used in future periods.

The $2.6 million gain on exit activities is primarily due to a gain on the recording of intangible assets received from RTI, partially offset by several individually immaterial asset write-downs and expense accruals incurred as a result of the transaction. The intangibles acquired from RTI in the transaction include procurement contracts and access to the procurement of cardiovascular and vascular human tissues previously received by RTI, customer lists, and a non-compete agreement. The assets transferred to RTI were internally developed intangible assets, and as such, had no book value on CryoLife’s Consolidated Balance Sheets prior to the transaction. The RTI Agreement was accounted for as a non-monetary exchange in accordance with Accounting Principles Board Opinion No. 29 (As Amended) “Accounting for Nonmonetary Transactions”, as clarified by Emerging Issues Task Force (“EITF”) 01-2 “Interpretations of APB Opinion No. 29” and SFAS 153 “Exchanges of Nonmonetary Assets” based upon a valuation study prepared by an independent valuation consultant.

4. Cash Equivalents and Marketable Securities

The following is a summary of cash equivalents and marketable securities (in thousands):

   Cost Basis  

Unrealized

Holding

Gains (Losses)

  

Estimated

Market

Value

December 31, 2006

      

Cash equivalents:

      

Money market funds

  $2,484  $—    $2,484

Marketable securities:

      

Government entity sponsored debt securities

  $3,964  $1  $3,965

Restricted securities:

      

Government entity sponsored debt securities

  $571  $—    $571

   Cost Basis  

Unrealized

Holding

(Losses) Gains

  

Estimated

Market

Value

December 31, 2005

     

Cash equivalents:

     

Money market funds

  $5,595  $—    $5,595

Marketable securities:

     

Government entity sponsored debt securities

  $2,980  $(2) $2,978

U.S. Treasury debt securities

   1,990   —     1,990
            

Total marketable securities

  $4,970  $(2) $4,968
            

Restricted securities:

     

Government entity sponsored debt securities

  $560  $—    $560

Gross realized gains on sales of available-for-sale securities totaled zero for the year ended December 31, 2006 and $3,000 for the year ended December 31, 2005. Differences between cost and market listed above, consisting of a net unrealized holding gain of $1,000 at December 31, 2006 and a net unrealized holding loss of $2,000 at December 31, 2005, are included as a separate component of other comprehensive income in the shareholders’ equity section of the Consolidated Balance Sheets.

At December 31, 2006 and 2005 all of the Company’s marketable securities had a maturity date within 90 days.

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5. Inventories

Inventories at December 31 are comprised of the following (in thousands):

   2006  2005

Raw materials

  $3,048  $3,083

Work-in-process

   479   415

Finished goods

   1,626   1,111
        

Total Inventories

  $5,153  $4,609
        

6. Debt

On February 8, 2005 CryoLife and its subsidiaries entered into a new credit agreement with Wells Fargo Foothill, Inc. as lender (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility in an aggregate amount equal to the lesser of $15.0 million (including a letter of credit subfacility of up to an aggregate of $2.0 million) or a borrowing base determined in accordance with the terms of the Credit Agreement. Generally, the borrowing base is 20% of the appraised value of the business of CryoLife, reduced by specified lender reserves. The Credit Agreement places further limitations on the amount that the Company may borrow, and includes various affirmative and negative covenants, including financial covenants such as a requirement that CryoLife maintain on a quarterly basis (i) a minimum aggregate borrowing capacity plus cash and cash equivalents, as defined, of $12.5 million or (ii) achieve an increasing level of minimum earnings before interest, taxes, depreciation, and amortization (“EBITDA”), BioGlue gross margins greater than 70% for the preceding twelve months, and cash and cash equivalents, as defined, of $5.0 million. While the Company currently expects that its aggregate borrowing capacity under the Credit Agreement will equal $15.0 million, there can be no assurance that the capacity will remain at this level. The Credit Agreement also includes customary conditions on incurring new indebtedness and limitations on cash dividends. Cash dividends on any class of capital stock are prohibited; provided that cash dividends on preferred stock may be paid so long as the Company maintains $7.5 million, in the aggregate, of cash, cash equivalents, and borrowing capacity, as defined. There is no restriction on the payment of stock dividends. Commitment fees are paid based on the unused portion of the facility. The Credit Agreement expires on February 7, 2008, at which time the outstanding principal balance will be due. Due to the terms of the Credit Agreement and due to the net losses and negative cash flows experienced by the Company since the FDA Order, the Company has classified amounts due under the Credit Agreement as short-term debt on the December 31, 2006 Consolidated Balance Sheet in accordance with the provisions of FASB Technical Bulletin No. 79-3 (As Amended).

Amounts borrowed under the Credit Agreement are secured by substantially all of the tangible and intangible assets of CryoLife and its subsidiaries and bear interest at the bank’s prime rate plus 1%, which was 9.25% as of December 31, 2006 and 8.25% as of December 31, 2005. As of December 31, 2006 and 2005 the outstanding balance of the Credit Agreement was $4.5 million and the remaining borrowing availability was $10.5 million.

The Company routinely enters into agreements to finance insurance premiums for periods not to exceed the terms of the related insurance policies. In the quarter ended June 30, 2006 the Company entered into two agreements to finance approximately $1.6 million and $715,000 in insurance premiums associated with the yearly renewal of certain of the Company’s insurance policies. The amounts financed accrued interest at a 6.71% and 6.70% rate, respectively, and were payable in equal monthly payments over a nine month period and an eight month period, respectively. As of December 31, 2006 the outstanding balance under the agreements was zero.

In the quarter ended June 30, 2005 the Company entered into two agreements to finance approximately $1.7 million and $761,000 in insurance premiums associated with the yearly renewal of certain Company insurance policies. The amounts financed accrued interest at a 4.98% and 5.01% rate, respectively, and were payable in equal monthly payments over a nine month period and an eight month period, respectively. As of December 31, 2005 the outstanding balance under the agreements was zero.

In September 2006 the Company’s European subsidiary obtained a pre-approved credit facility with a bank in the United Kingdom for the financing of vehicles. This credit facility pre-approves the Company to enter into leases to finance vehicles, for which terms and interest rates are set for each individual lease agreement. The Company has accounted for the leases entered into under this credit facility as operating leases. The credit facility allows the Company to have a total exposure on outstanding leases, as defined by the bank, of £180,000 (or approximately $353,000 as of December 31, 2006). Per the bank, the Company had a total exposure of approximately £90,000 or $176,000 as of December 31, 2006, and the Company’s total payment obligations related to these outstanding leases was $109,000 as of December 31, 2006.

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Total interest expense was $657,000, $346,000, and $196,000 in 2006, 2005, and 2004, respectively.

7. Private Equity Placement

On January 7, 2004 the Company’s Board of Directors authorized an agreement with a financial advisory company to sell shares of the Company’s common stock in a private investment in public equity transaction (the “PIPE”). The PIPE was consummated on January 27, 2004, and resulted in the sale of approximately 3.4 million shares of stock at a price of $6.25 per share. The sale generated net proceeds of approximately $19.3 million, after commissions, filing fees, late registration fees, and other related charges, which was used for general corporate purposes. The Company filed a registration statement on Form S-3 with the SEC covering the resale of the shares sold in the PIPE by the investors. The Company paid a total of $466,000 in late registration penalties to the investors through May 18, 2004, the date the registration statement was declared effective. This amount was deducted from the PIPE proceeds in recording net proceeds from the PIPE in shareholders’ equity.

8. Convertible Preferred Stock

On December 17, 2004 the Company announced that it had filed a shelf registration statement on Form S-3 with the SEC covering the sale from time to time of up to $50 million of its common stock, preferred stock, depositary shares, or any combination of these securities for its own account in one or more offerings.

On March 18 and April 19, 2005 the Company completed a public offering of 417,000 shares of 6% convertible preferred stock (the “Preferred Stock”) at a price to the public of $50.00 per share. Net proceeds from the offering, after deducting underwriting discounts and offering-related expenses, totaled approximately $19.1 million.

Dividends on the Preferred Stock are cumulative from the date of original issue at the annual rate of 6% of the liquidation preference of the Preferred Stock, payable quarterly on the first day of January, April, July, and October, commencing July 1, 2005. Any dividends must be declared by the Company’s board of directors and must come from funds that are legally available for dividend payments. The Company declared dividends of $973,000 and $777,000 in the years ended December 31, 2006 and 2005, respectively to shareholders of record. The Company made cash payments of $973,000 and $533,000 in the years ended December 31, 2006 and 2005, respectively for dividends declared. Dividends of approximately $243,000 were paid on January 2, 2007 to shareholders of record on December 22, 2006.

The Preferred Stock is convertible at the option of the holder at any time into the Company’s common stock at a conversion rate of approximately 6.2189 shares of common stock for each share of Preferred Stock, based on an initial conversion price of $8.04. The initial conversion price is subject to adjustment in certain events. The Company reserved 4,600,000 shares of common stock for issuance upon conversion. Through December 31, 2006 holders had voluntarily converted 92,000 shares of Preferred Stock into 575,000 shares of common stock.

The Company may automatically convert the Preferred Stock into common stock if the closing price of the Company’s common stock has exceeded $12.06, which is 150% of the conversion price of the Preferred Stock, for at least 20 trading days during any 30-day trading period, ending within five trading days prior to notice of automatic conversion.

If the Company elects to automatically convert, or the holder elects to voluntarily convert, some or all of the Preferred Stock into common stock prior to April 1, 2008, the Company will make an additional payment on the Preferred Stock equal to the aggregate amount of dividends that would have been payable on the Preferred Stock through and including April 1, 2008, less any dividends already paid on the Preferred Stock, (the “Dividend Make-Whole Payment”). The Dividend Make-Whole Payment is payable in cash or, at the Company’s option, in shares of the Company’s common stock, or a combination of cash and shares of common stock. At December 31, 2006 the Company had issued 119,000 shares of common stock to converting holders to satisfy this additional payment.

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The Preferred Stock has a liquidation preference of $50 per share, plus accrued and unpaid dividends. The liquidation preference of the Preferred Stock was approximately $16.5 million as of December 31, 2006, before the payment of the January 2007 dividend.

The Company may elect to redeem the Preferred Stock, in whole or in part, at declining redemption prices on or after April 7, 2008.

The Preferred Stock has no maturity date and no voting rights prior to conversion into common stock, except under limited circumstances.

9. Derivatives

Dividend Make-Whole Payments

In accordance with SFAS 133, the Company is required to separate and account for the Dividend Make-Whole Payment feature of its Preferred Stock as an embedded derivative, (the “Derivative”). As an embedded derivative instrument, the Dividend Make-Whole Payment feature must be measured at fair value and reflected as a current liability on the Company’s Consolidated Balance Sheets. Changes in the fair value of the Derivative are recognized in the line item change in valuation of derivative as a non-operating income (expense) on the Company’s Consolidated Statements of Operations. The Company determined the fair value of the Derivative to be $1.0 million on March 18, 2005, the date of issuance. The Company determined the fair value of the Derivative related to the issuance upon exercise of the underwriter’s over allotment option to be $32,000 on April 19, 2005, the date of issuance. These amounts were allocated from the proceeds of the Preferred Stock to the derivative liability.

Due to the quarterly revaluation of the derivative liability, the Company recorded other expense of $121,000 and other income of $140,000 for the years ended December 31, 2006 and 2005, respectively.

10. Commitments and Contingencies

Leases

The Company’s capital lease obligations result from the financing of certain of the Company’s equipment. The Company’s operating lease obligations result from the lease of land and buildings that comprise the Company’s corporate headquarters and manufacturing facilities, leases related to additional manufacturing, office, and warehouse space rented by the Company, leases on housing for expatriated employees, leases on Company vehicles, and leases on a variety of office equipment.

The term of the lease of the land and buildings that comprise the Company’s corporate headquarters was originally 15 years and was later extended to 19 years. This lease expires in 2015. Certain leases contain escalation clauses and renewal options for additional periods. Rent expense is computed on the straight-line method over the lease term with the offsetting accrual recorded in other long-term liabilities.

F-21


Future minimum lease payments under non-cancelable leases as of December 31, 2006 are as follows (in thousands):

   Leases
   Capital  Operating
    

2007

  $53  $2,459

2008

   52   2,360

2009

   53   2,226

2010

   35   2,119

2011

   —     2,145

Thereafter

   —     8,524
        

Total minimum lease payments

  $193  $19,833
      

Less amount representing interest at a weighted average 9% interest rate

   29  
      

Present value of net minimum lease payments

   164  

Less current maturities

   40  
      

Capital lease obligations, less current maturities

  $124  
      

The gross amount of property acquired under capital leases included in the Consolidated Balance Sheets consists of the following (in thousands):

   2006  2005

Equipment

  $937  $730

Furniture and fixtures

   765   686

Leasehold improvements

   1,244   1,244
        

Total

  $2,946  $2,660
        

The amortization of the Company’s assets acquired under capital leases is recorded as depreciation expense based on the life of the lease. Total rental expense for operating leases was $2.3 million, $2.4 million, and $2.5 million, for 2006, 2005, and 2004, respectively. Total rental income under a sublease that terminated during 2005 was $258,000 and $310,000 in 2005 and 2004, respectively.

Litigation, Claims, and Assessments

Product Liability Claims

In the normal course of business as a medical device and services company, the Company has product liability complaints filed against it. As of February 16, 2007 the Company was aware of three pending product liability lawsuits. The lawsuits are currently in the pre-discovery or discovery stages. Of these lawsuits, two allege product liability claims arising out of the Company’s allograft heart valve tissue services, and one alleges a product liability claim arising from the Company’s allograft orthopaedic tissue services.

Two of the outstanding product liability lawsuits against the Company are not covered by insurance, as the claimed loss date was prior to the effective coverage date for the insurance policy. Additional uninsured claims may be filed in the future. Other product liability claims have been asserted against the Company that have not resulted in lawsuits as of February 16, 2007. The Company is monitoring these claims.

The Company performed an analysis as of December 31, 2006 of the settled but unpaid claims and the pending product liability claims based on settlement negotiations to date and advice from counsel. As of December 31, 2006 the Company had accrued a total of approximately $330,000 for pending product liability. The $330,000 accrual is included as a component of accrued expenses and other current liabilities on the December 31, 2006 Consolidated Balance Sheet. This amount represents the Company’s estimate of the probable losses related to one of the three pending product liability claims. The Company has not recorded an accrual for the remaining two product liability claims because management has concluded that either a loss is remote or that, although a loss is reasonably possible or probable, a reasonable estimate of that loss or the range of losses cannot be made at this time. As of December 31, 2005 the Company had accrued a total of approximately $1.5 million for settled but unpaid claims and pending product liability claims and recorded $244,000 representing amounts to be recovered from the Company’s insurance carriers. The $1.5 million accrual is included as a component of accrued expenses and other current liabilities on the December 31, 2005 Consolidated Balance Sheet.

F-22


If the Company is unable to settle one or more of the product liability lawsuits in which the Company is a defendant, and if any such lawsuit should be tried with a substantial verdict rendered in favor of the plaintiff(s), there can be no assurance that such verdict(s) would not exceed the Company’s available liquid assets. Additionally, the Company does not have a reasonable method for estimating the amount of compensatory or punitive damages that could be assessed by a trial jury with respect to any lawsuit that it is unable to settle prior to trial, and the Company’s product liability insurance policies do not include coverage for any punitive damages. Failure by the Company to resolve the outstanding product liability claims within its ability to pay would have a material adverse effect on the financial position, results of operations, and cash flows of the Company.

On April 1, 2006 the Company bound coverage for the 2006/2007 insurance policy year. This policy is a four-year claims-made insurance policy, i.e. claims incurred during the period April 1, 2003 through March 31, 2007 and reported during the period April 1, 2006 through March 31, 2007 are covered by this policy. Claims incurred prior to April 1, 2003 that have not been reported are uninsured.

The Company maintains claims-made insurance policies to mitigate its financial exposure to product liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. Thus, a claims-made policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. The Company periodically evaluates its exposure to unreported product liability claims and records accruals as necessary for the estimated cost of unreported claims related to services performed and products used. In January 2007 the Company retained an independent actuarial firm to perform revised estimates of the unreported claims as of December 31, 2006. The independent firm estimated the unreported product loss liability using a frequency-severity approach, whereby projected losses were calculated by multiplying the estimated number of claims by the estimated average cost per claim. The estimated claims were calculated based on the reported claim development method and the Bornhuetter-Ferguson method using a blend of the Company’s historical claim experience and industry data. The estimated cost per claim was calculated using a lognormal claims model blending the Company’s historical average cost per claim with industry claims data. The independent actuarial firm used a number of assumptions in order to estimate the unreported product loss liability including:

A ceiling of $5.0 million was selected for actuarial purposes in determining the liability per claim given the uncertainty in projecting claim losses in excess of $5.0 million,

The future claim reporting lag time would be a blend of the Company’s experiences and industry data,

The frequency of unreported claims for accident years 2001 through 2006 would be lower than the Company’s experience in the 2002/2003 policy year, but higher than the Company’s historical claim frequency prior to the 2002/2003 policy year,

The average cost per claim would be lower than the Company’s experience since the 2002/2003 policy year, but higher than the Company’s historical cost per claim prior to the 2002/2003 policy year,

The average cost per BioGlue claim would be consistent with the Company’s overall historical exposures until adequate historical data is available on this product line, and

The number of BioGlue claims per million dollars of BioGlue revenue would be 40% lower than non-BioGlue claims per million dollars of revenue. The 40% factor was selected based on BioGlue claims experience to-date and consultation with the actuary.

The Company believes that these assumptions provide a reasonable basis for the calculation of the unreported product liability loss, but accuracy of the actuarial firm’s estimates is limited by the general uncertainty that exists for any estimate of future activity due to uncertainties surrounding the assumptions used and due to Company specific conditions, the Company’s increased litigation activity following the FDA Order, the Company’s low volume of pre-FDA Order historical claims, and the scarcity of industry data directly relevant to the Company’s business activities. Due to these factors, actual results may differ significantly from the assumptions used and amounts accrued.

Based on the actuarial valuation performed in January 2007 as of December 31, 2006, the Company estimated that its liability for unreported product liability claims was $6.6 million as of December 31, 2006. In accordance with Emerging Issues Task Force Issue 03-8, the Company has accrued $6.6 million, representing the Company’s best estimate of the total liability for

F-23


unreported product liability claims related to services performed and products sold prior to December 31, 2006. The $6.6 million balance is included as a component of accrued expenses and other current liabilities of $3.3 million and other long-term liabilities of $3.3 million on the December 31, 2006 Consolidated Balance Sheet. Further analysis indicated that the liability could be estimated to be as high as $12.3 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques. Based on the actuarial valuation, the Company estimated that as of December 31, 2006, $2.3 million of the accrual for unreported liability claims would be recoverable under the Company’s insurance policies. The $2.3 million insurance recoverable is included as a component of other receivables of $1.1 million and other long-term assets of $1.2 million on the December 31, 2006 Consolidated Balance Sheet. These amounts represent management’s estimate of the probable losses and anticipated recoveries for unreported product liability claims related to services performed and products sold prior to December 31, 2006. Actual results may differ from this estimate.

As of December 31, 2005 the Company accrued $7.5 million for unreported product liability claims and recorded a receivable of $2.5 million for unreported liability claims estimated to be recoverable under the Company’s insurance policies. This $7.5 million accrual is included as a component of accrued expenses and other current liabilities of $3.8 million and other long-term liabilities of $3.7 million on the December 31, 2005 Consolidated Balance Sheet. The $2.5 million insurance recoverable is included as a component of other current receivables of $1.1 million and other long-term assets of $1.4 million on the December 31, 2005 Consolidated Balance Sheet.

Class Action Lawsuit

Several putative class action lawsuits were filed in July through September 2002 against the Company and certain officers of the Company, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on a series of purportedly materially false and misleading statements to the market. The suits were consolidated, and a consolidated amended complaint filed, that principally alleged that the Company made misrepresentations and omissions relating to product safety and the Company did not comply with certain FDA regulations regarding the handling and processing of certain tissues and other product safety matters. The consolidated complaint sought certification of a class of purchasers between April 2, 2001 and August 14, 2002, compensatory damages, and other expenses of litigation.

On July 21, 2005 the Company reached an agreement in principle to settle the securities class action lawsuit. The settlement resolved all claims asserted against the Company and the individual defendants in this case. The terms of the settlement included a total settlement of $23.25 million in cash and stock. The cash payment, which included approximately $12.0 million in insurance proceeds and approximately $9.3 million in Company funds, was paid in the third and fourth quarter of 2005. The Company transferred 500,000 shares valued at $2.0 million in the fourth quarter of 2005 in payment of the stock portion of the settlement. The Company and the individual defendants have denied any wrongdoing and liability whatsoever, and the settlement does not contain any admission of liability.

Insurance Coverage Dispute

In September 2006 the Company favorably settled insurance coverage disputes with former insurance carriers for $2.1 million, net of associated legal fees. The disputes involved losses stemming from approximately $11.3 million paid in 2005 by the Company in settlement of outstanding claims. No party admitted any liability as part of the September 2006 settlement. The net proceeds of $2.1 million were received in October 2006 and are included as a component of general, administrative, and marketing expenses on the Consolidated Statements of Operations for the year ended December 31, 2006.

Shareholder Derivative Action

On August 30, 2002 a purported shareholder derivative action was filed by Rosemary Lichtenberger against Steven G. Anderson, Albert E. Heacox, John W. Cook, Ronald C. Elkins, Virginia C. Lacy, Ronald D. McCall, Alexander C. Schwartz, and Bruce J. Van Dyne in the Superior Court of Gwinnett County, Georgia. The suit, which named the Company as a nominal defendant, alleged that the individual defendants breached their fiduciary duties to the Company by causing or allowing the Company to engage in certain inappropriate practices that caused the Company to suffer damages. The complaint was preceded by one day by a letter written on behalf of Ms. Lichtenberger demanding that the Company’s Board of Directors take certain actions in response to her allegations. On January 16, 2003 another purported derivative suit alleging claims similar to those of the Lichtenberger suit was filed in the Superior Court of Fulton County by complainant Robert F. Frailey. As in the Lichtenberger suit, the filing of the complaint in the Frailey action was preceded by a demand letter sent on Frailey’s behalf to the Company’s Board of Directors. Both complaints sought undisclosed damages, costs and attorney’s fees, punitive damages, and prejudgment interest against the individual defendants derivatively on behalf of the Company.

F-24


A settlement with respect to the shareholder derivative lawsuit was agreed to by the parties and approved by the board and the court. Pursuant to the settlement, the Company paid $3.5 million, in the third quarter of 2005, related to the plaintiffs’ counsel fees and expenses. The $3.5 million payment was entirely covered by the Company’s insurance carriers.

Additionally, as part of the settlement, the Company and its management have also agreed to several changes in corporate governance, including the identification and appointment of a new director with regulatory experience who was appointed in December 2005, the formation of a regulatory affairs and quality assurance committee, and the adoption of SFAS 123R in the fourth quarter of 2005.

SEC Investigation

On August 19, 2002 the Company issued a press release announcing that on August 17, 2002, the Company received a letter from the Atlanta District Office of the SEC inquiring about certain matters relating to the Company’s August 14, 2002 announcement of the FDA Order. The SEC notified the Company in July 2003 that the inquiry became a formal investigation in June 2003. CryoLife has cooperated with this investigation both before and after the issuance of the formal order of investigation in June 2003 and intends to continue doing so. CryoLife voluntarily reported the names of six employees and former employees to the SEC in December 2002 after discovering they had apparently sold CryoLife shares on August 14, 2002, before trading was halted pending CryoLife’s press release reporting the FDA Order. These individuals were not and are not executive officers of CryoLife. The formal order of investigation indicates that the SEC’s scope includes whether, during 2002, among other things, CryoLife or others may have traded while in possession of material nonpublic information, made (or caused to be made) false or misleading statements or omissions in press releases and SEC filings, and failed to maintain accurate records and adequate controls. The investigation could also encompass matters not specifically identified in the formal order. On September 15, 2005 the SEC announced that it had commenced proceedings in federal district court against certain of the above-referenced former and current employees (and certain of their spouses) for alleged illegal insider trading arising out of their August 14, 2002 trading activities. Those proceedings resulted in settlements with the SEC. As of the date hereof, the SEC has had no discussions with CryoLife as to whether the SEC will seek additional relief against CryoLife, or the nature of any relief that may be sought. At present, CryoLife is unable to predict the ultimate focus, its current status, outcome of the investigation, or when it will be completed. An unfavorable outcome could have a material adverse effect on CryoLife’s reputation, business, financial position, results of operations, and cash flows.

11. Stock Option and Stock Incentive Plans and Stock Compensation

Stock Option and Incentive Plans

The Company has stock option and stock incentive plans that provide for grants to employees and directors of shares and options to purchase shares of the Company’s common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. Options granted to employees typically become exercisable over a five-year vesting period and have a 66 month term. Options granted to directors typically vest immediately and have a 60 month term.

As of December 31, 2006 the Company is authorized to grant under the Company’s plans up to the following number of shares:

Plan

Shares

1998 Long-Term Incentive Plan

900,000

2002 Stock Incentive Plan

974,000

2004 Employee Stock Incentive Plan

2,000,000

2004 Non-Employee Directors Stock Option Plan

500,000

As of December 31, 2006 and 2005 there were 1.9 million and 2.6 million, respectively, shares of common stock reserved for future issuance under the Company’s stock option and stock incentive plans after considering prior grants. Upon the exercise of stock options, the Company may issue the required shares out of authorized but unissued common stock or out of treasury stock, at management’s discretion.

F-25


A summary of Company’s stock option transactions under the plans as of and for the year ended December 31, 2006, 2005, and 2004 follows:

   Shares  

Weighted

Average

Exercise Price

  

Weighted

Average

Remaining

Contractual

Term

  

Aggregate

Intrinsic

Value

Outstanding at December 31, 2003

  2,523,000  $11.48    
           

Granted

  319,000   5.49    

Exercised

  (72,000)  2.32    

Forfeited

  (123,000)  9.47    

Expired

  (354,000)  11.54    
              

Outstanding at December 31, 2004

  2,293,000  $11.04  2.78  $3,354,000
         

Granted

  115,000   7.08    

Exercised

  (36,000)  3.14    

Forfeited

  (126,000)  5.62    

Expired

  (492,000)  10.24    
              

Outstanding at December 31, 2005

  1,754,000  $11.55  2.42  $505,000
         

Granted

  948,000   4.98    

Exercised

  (101,000)  2.25    

Forfeited

  (103,000)  5.09    

Expired

  (310,000)  26.67    
              

Outstanding at December 31, 2006

  2,188,000  $7.29  3.03  $5,328,000
         

Vested and Expected to Vest

  2,084,000  $7.41  0.90  $5,053,000

Exercisable at December 31, 2006

  1,091,000  $9.69  1.89  $2,318,000

The following table summarizes information concerning outstanding and exercisable options at December 31, 2006:

Options Outstanding

 

Options Exercisable

Range of

Exercise

Price

 

Average

Number
Outstanding

 

Weighted

Average

Remaining
Contract Life

 

Weighted

Average
Exercise Price

 

Number

Exercisable

 

Weighted

Average

Exercise Price

$2.20-4.25

 595,000 2.65 $3.11 271,000 $2.24

4.78-5.03

 450,000 3.94 4.97 155,000 4.92

5.05-5.80

 554,000 4.05 5.43 131,000 5.31

6.16-27.90

 496,000 1.85 12.26 441,000 12.99

29.15-30.86

 93,000 1.16 29.72 93,000 29.72
           

$2.20-30.86

 2,188,000 3.03 $7.29 1,091,000 $9.69
       

Other information concerning stock options for the years ended December 31 is as follows:

   2006  2005  2004

Weighted average fair value of options granted

  $2.64  $3.51  $2.80

Intrinsic value of options exercised

  $362,000  $148,000  $304,000

In August 2006 the Company’s Board of Directors authorized the grant of stock to its non-employee directors. The stock grants of 2,500 shares of common stock per non-employee director were valued at a total of $109,000 based on the

stock price of $5.47 on the date of grant. The value of this stock grant will be recorded as director compensation over the 12-month vesting period. As of December 31, 2006 the Company recorded $36,000 in expense related to these stock grants and had deferred compensation recorded of $73,000. The Company also made cash payments totaling $38,000 to the non-employee directors to partially offset each individual’s income tax liability as a result of the stock grant.

In February 2006 the Company’s Board of Directors authorized the grant of stock to recognize the performance of certain Company executives. The stock grants totaled 34,000 shares of common stock, which were valued at $145,000 based on the

F-26


stock price of $4.25 on the date of grant. The Company purchased $50,000 of Company stock from employees, based on the closing price on the New York Stock Exchange on the day the stock was transferred to the Company, to pay employee federal and state withholding taxes related to these stock grants. The Company recorded $145,000 in compensation expense related to these stock grants for the year ended December 31, 2006. As of December 31, 2006 the executive stock grants were fully vested.

On November 2, 2004 the Company’s Board of Directors authorized the grant of stock to Company employees in lieu of annual performance based salary increases and to recognize the performance of certain Company executives. The stock grants totaled 84,000 shares of common stock, which were valued at $580,000 based on the stock price of $6.91 on the date of grant. Certain of these stock grants, contingent upon future service to the Company, vested at a rate of one twelfth per month for the twelve months following the grant date. Certain federal and state withholding taxes related to the stock grant were paid by individual employees through deduction of 2004 earnings or through payments made in cash or Company stock. The Company purchased $54,000 in treasury stock from employees, based on the closing price on the day the stock was transferred to the Company, to pay employee federal and state withholding taxes related to these stock grants. The Company recorded $202,000 and $358,000 in compensation expense related to these stock grants for the years ended December 31, 2005 and 2004, respectively. The Company reversed $20,000 of deferred compensation due to stock grants that were cancelled in 2005. As of December 31, 2005 the employee stock grants were fully vested and the Company had zero remaining as deferred compensation in the equity section of the Consolidated Balance Sheet.

A summary of stock grants follows:

   Shares  

Weighted
Average
Grant Date

Fair Value

Unvested at December 31, 2003

  —    $—  

Granted

  84,000   6.91

Vested

  (52,000)  6.91
       

Unvested at December 31, 2004

  32,000   6.91

Vested

  (29,000)  6.91

Canceled

  (3,000)  6.91
       

Unvested at December 31, 2005

  —     —  

Granted

  54,000   4.70

Vested

  (41,000)  4.70
       

Unvested at December 31, 2006

  13,000  $4.70
       

Stock Compensation

The Company early adopted SFAS 123R for the period beginning October 1, 2005. The Company’s decision to early adopt SFAS 123R was pursuant to the shareholder derivative action settlement, as discussed in Note 10. SFAS 123R requires companies to recognize the cost of all share-based payments in the financial statements using a fair-value based measurement method. The Company adopted SFAS 123R using the modified version of prospective application, as defined in SFAS 123R, and, as such, the adoption did not affect prior interim or year end periods.

In anticipation of the adoption of SFAS 123R on September 30, 2005, the Company’s Board of Directors approved the accelerated vesting of unvested and “out-of-the-money” options with an exercise price equal to or greater than $6.97, the closing price of the Company’s common stock on September 29, 2005. Vesting was accelerated on a total of 167,000 options for 29 employees with a range of exercise prices from $7.03 to $31.99. As a result of this accelerated vesting the Company recorded on a pro forma basis an additional expense of $1.4 million for the three and nine months ended September 30, 2005. This expense is deducted from the net loss applicable to common shares – as reported to calculate net loss applicable to common shareholders – pro forma and the corresponding pro forma loss per share amounts in the tables below. The decision to initiate the accelerated vesting, which the Company believed to be in the best interest of the Company and its shareholders, was made primarily to reduce compensation expense related to unvested “out-of-the-money” options that might be recorded in future periods following the Company’s adoption of SFAS 123R on October 1, 2005.

The Company also maintains a shareholder approved Employee Stock Purchase Plan (the “ESPP”) for the benefit of its employees. See Note 14 for additional discussions of the ESPP. The ESPP allows eligible employees the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. Pursuant to the adoption of SFAS 123R the lookback portion of the Company’s ESPP constitutes an option and as such issuances of stock under the Company’s ESPP must be valued and expensed.

F-27


SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after the required effective date or implementation date, as well as to the unvested portion of awards outstanding as of the required effective date or implementation date. The Company uses the Black-Scholes model to value its stock option grants under SFAS 123R and expenses the related compensation cost using the straight-line method over the vesting period. The fair value of the Company’s ESPP options is also determined using the Black-Scholes model and is expensed quarterly at the end of the purchase period, as the option is fully vested at that time. The fair value of stock options is determined on the grant date using assumptions for the expected term, expected volatility, dividend yield, and the risk free interest rate. The term assumption is primarily based on the contractual term of the option and historic data related to exercise and post-vesting cancellation history experienced by the Company, adjusted based on management’s expectations of future results. The expected term is determined separately for options issued to the Company’s directors and to employees. The Company’s anticipated volatility level is primarily based on the historic volatility of the Company’s common stock, adjusted to remove the effects of certain periods of unusual volatility not expected to recur, and adjusted based on management’s expectations of future volatility, for the life of the option or option group. The Company’s model includes a zero dividend yield assumption, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The risk free interest rate is based on recent U.S. Treasury note auction results with a similar life to that of the option. The Company’s model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such restrictions. The period expense is then determined based on the valuation of the options, and at that time an estimated forfeiture rate is used to reduce the expense recorded. The Company’s estimate of pre-vesting forfeitures is primarily based on the recent historical experience of the Company, and is adjusted to reflect actual forfeitures as the options vest.

During the fourth quarter of 2006, the Company’s valuation analyst performed its annual review of the underlying assumptions the Company uses in its Black-Scholes model for the valuation of options in accordance with SFAS 123R. During this review the Company evaluated the volatility, expected term, and forfeitures. The Company began using these revised assumptions for all options granted beginning in the fourth quarter of 2006.

The following weighted-average assumptions were used to determine the fair value of options under SFAS 123R:

   Twelve Months Ended
December 31, 2006
  Three Months Ended
December 31, 2005
 
   Stock Options  ESPP Options  Stock Options  ESPP Options 

Expected dividend yield

  0% 0% 0% 0%

Expected stock price volatility

  .650  .417  .650  .525 

Risk-free interest rate

  4.80% 4.39% 4.32% 3.55%

Expected life of options

  4.1 Years  .24 Years  5 Years  .25 Years 

The modified prospective approach requires that the Company expense over the remaining vesting period the value it previously calculated under the fair value method for stock options issued prior to the adoption of SFAS 123R. As of October 1, 2005, the date of adoption, there was approximately $593,000 in total unrecognized compensation cost related to unvested stock, before considering estimated forfeitures. That cost is expected to be recognized based on the vesting of the underlying option awards through the quarter ended June 30, 2010.

For the year ended December 31, 2006 the Company’s stock-based compensation expense was approximately $1.6 million of which approximately $852,000 was related to stock option grants and ESPP, $587,000 was related to executive bonuses paid by the issuance of stock during 2007, and $181,000 was related to common stock grants. The Company capitalized $75,000 of the stock-based compensation expense into its deferred preservation costs and inventory costs. For the year ended December 31, 2005 the Company’s stock-based compensation expense was approximately $322,000 of which approximately $120,000 was related to stock option grants and ESPP and $202,000 was related to common stock grants. The Company capitalized $37,000 of the stock-based compensation expense into its deferred preservation costs and inventory costs. Included in this total stock-based compensation expense were expenses related to options issued prior and subsequent to the adoption of SFAS 123R and compensation related to the Company’s ESPP and common stock grants. This amount was recorded as compensation expense and subject to the Company’s normal allocation of expenses to inventory and deferred preservation costs. The Company did not recognize a tax benefit, or a related operating cash outflow and financing cash inflow, related to the additional compensation expense recorded in the years ended December 31, 2006 and 2005 as the Company is maintaining a full valuation allowance on its deferred tax assets. See Note 16 for additional discussions of the Company’s income tax valuation.

F-28


As of December 31, 2006 and December 31, 2005 there was approximately $2.1 million and $495,000, respectively, in total unrecognized compensation costs related to nonvested share-based compensation arrangements, before considering the effect of expected forfeitures. As of December 31, 2006 and 2005 this expense is expected to be recognized over a weighted average period of 2.0 years and 1.5 years, respectively.

In periods prior to October 1, 2005 the Company elected to follow APB 25 in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant, no compensation expense was recognized. In accordance with APB 25 the compensation recorded for employee stock grants was equal to the value of the grant on the measurement date, the date of the grant, as determined by the closing price of the Company’s common stock on that date. Some employee stock grants vested in future periods based on a requirement of continued service to the Company. For these stock grants the amount of the stock grant was recorded as deferred compensation in the equity section of the Company’s Consolidated Balance Sheets, and was expensed on a straight-line basis over the vesting period.

Pro forma information regarding net loss and loss per share was required by SFAS 123R for options accounted for under ABP 25. SFAS 123R required that option valuation information be disclosed as if the Company accounted for its employee stock options granted under the fair value method of that statement. The fair values for these options were estimated at the dates of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions were used:

   

Nine Months Ended
September 30,

2005

  

Twelve Months Ended
December 31,

2004

 
   (unaudited)    

Expected dividend yield

  0% 0%

Expected stock price volatility

  .519  .589 

Risk-free interest rate

  3.36% 3.09%

Expected life of options

  3.2 Years  3.7 Years 

For purposes of pro forma disclosures, the estimated fair values of the options are amortized to expense over the options’ vesting periods on a ratable basis. The Company’s pro forma information follows (in thousands, except per share data):

   

Nine Months Ended
September 30,

2005

  

Twelve Months Ended
December 31,

2004

 
   (unaudited)    

Basic net loss applicable to common shares—as reported

  $(19,387) $(18,749)

Stock-based employee compensation:

   

Add expense included in the determination of net loss

   166   358 

Deduct expense determined under the fair value based method for all awards

   3,253   3,093 
         

Basic net loss applicable to common shares—pro forma

  $(22,474) $(21,484)
         

Basic weighted-average shares

   23,839   23,043 

Basic loss per common share:

   

As reported

  $(0.81) $(0.81)
         

Pro forma

  $(0.94) $(0.93)
         

F-29


   

Nine Months Ended
September 30,

2005

  

Twelve Months Ended
December 31,

2004

 
   (unaudited)    

Diluted net loss applicable to common shares—as reported

  $(19,387) $(18,749)

Stock-based employee compensation:

   

Add expense included in the determination of net loss

   166   358 

Deduct expense determined under the fair value based method for all awards

   3,253   3,093 
         

Diluted net loss applicable to common shares—pro forma

  $(22,474) $(21,484)
         

Diluted weighted-average shares

   23,839   23,043 

Diluted loss per common share:

   

As reported

  $(0.81) $(0.81)
         

Pro forma

  $(0.94) $(0.93)
         

12. Shareholder Rights Plan

On November 1, 2005 the CryoLife, Inc. Board of Directors approved the amendment and restatement of the shareholder rights agreement, which was previously adopted by the Board in 1995. The Board of Directors determined that the amendment and extension of the rights agreement protected the long-term share value for the Company’s shareholders. Under the rights agreement each share of the Company’s common stock outstanding on December 11, 1995 is entitled to one “Right,” as defined in, and subject to, the terms of the rights agreement. A Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A junior participating preferred stock (“Series A Stock”) of the Company at $33.33 per one one-hundredth of a Preferred Share, subject to adjustment. Additionally, each common share that has or shall become outstanding after December 11, 1995 is also entitled to a Right, subject to the terms and conditions of the rights agreement. At the meeting on November 1, 2005, the Board also declared that each share of 6% convertible preferred stock of the Company (a “Convertible Share”) outstanding on November 23, 2005 is entitled to one Right for each share of common stock into which the Convertible Share is convertible as of the Distribution Date (as defined in the rights agreement), subject to the terms and conditions of the rights agreement. Each Convertible Share that becomes outstanding after November 23, 2005 is also entitled to a Right, subject to the terms and conditions of the rights agreement. The Rights, which expire on November 23, 2015, may be exercised only if certain conditions are met, such as the acquisition of 15% or more of the Company’s common stock by a person or affiliated group (together with its affiliates, associates, and transferees, an “Acquiring Person”). Rights beneficially owned by an Acquiring Person become void from and after the time such persons become Acquiring Persons, and Acquiring Persons have no rights whatsoever under the rights agreement.

Each share of Series A Stock purchasable upon exercise of a Right will be entitled, when, as, and if declared, to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock. In the event of liquidation each share of the Series A Stock will be entitled to a minimum preferential liquidation payment of 100 times the payment made per share of common stock. Finally in the event of any merger, consolidation, or other transaction in which shares of common stock are exchanged, each share of Series A Stock will be entitled to receive 100 times the amount received per share of common stock. These rights are protected by customary antidilution provisions.

In the event the Rights become exercisable, each Right will enable the owner, other than Acquiring Persons, to purchase shares of the Company’s Series A Stock as described above. Alternatively, if the Rights become exercisable, the holder of a Right may elect to receive, upon exercise of the Right and in lieu of receiving Series A Stock, that number of shares of common stock of the Company having an exercise value of two times the exercise price of the Right. In the event that, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise of a Right, and in lieu of Series A Stock of the Company, that number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) that at the time of such transaction will have a market value of two times the exercise price of the Right. In addition, after any person or group becomes an Acquiring Person and prior to the acquisition by the person or group of 50% or more of the outstanding common stock, the Board of Directors may elect to exchange all outstanding Rights at an exchange ratio of one share of common stock (or fractional share of Series A Stock or other preferred shares) per Right (subject to adjustment).

F-30


13. Comprehensive Income (Loss)

Components of comprehensive income (loss) consist of the following, net of applicable taxes (in thousands):

   2006  2005  2004 

Net income (loss)

  $       365  $(19,535) $(18,749)

Unrealized gain (loss) on investments

   3   (34)  (53)

Translation adjustment

   34   (204)  49 
             

Comprehensive income (loss)

  $402  $(19,773) $(18,753)
             

The tax effect on the change in unrealized gain (loss) on investments is zero, $11,000, and $28,000 for the years ended December 31, 2006, 2005, and 2004, respectively. The tax effect of the translation adjustment is a benefit of $91,000 for the year ended December 31, 2006 and an expense of $64,000, and $17,000, for the years ended December 31, 2005 and 2004, respectively.

At December 31, 2006, components of accumulated other comprehensive income consist of the following, (in thousands):

   2006  2005 

Unrealized gain (loss) on investments

  $1  $(2)

Translation adjustment

   159   125 
         

Total accumulated other comprehensive income

  $160  $123 
         

14. Employee Benefit Plans

The Company has a 401(k) savings plan (the “Plan”) providing retirement benefits to all employees who have completed at least three months of service. The Company made matching contributions of 50% of each participant’s contribution for up to 4% of each participant’s salary in 2006, 2005, and 2004. Total Company contributions approximated $340,000, $296,000, and $312,000 for 2006, 2005, and 2004, respectively. Additionally, the Company may make discretionary contributions to the Plan that are allocated to each participant’s account. In 2006 discretionary contributions of $56,000 were made by the plan administrator on behalf of the Company. No discretionary contributions were made in 2005 or 2004.

On May 16, 1996 the Company’s shareholders approved the CryoLife, Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible employees the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. As of December 31, 2006 and 2005 there were 205,000 and 281,000, respectively, shares of common stock reserved under the ESPP and there were 695,000 and 619,000, respectively, shares issued under the plan.

F-31


15. Loss Per Common Share

The following table sets forth the computation of basic and diluted loss per common share (in thousands, except per share data):

   2006  2005  2004 

Numerator for basic income (loss) per common share:

    

Net income (loss)

  $365  $(19,535) $(18,749)

Effect of preferred stocka

   (973)  (777)  —   
             

Net loss applicable to common shares

  $(608) $(20,312) $(18,749)
             

Denominator for basic loss per common share:

    

Basic weighted-average common shares

   24,829   23,959   23,043 
             

Basic loss per common share

  $(0.02) $(0.85) $(0.81)
             

Numerator for diluted income (loss) per common share:

    

Net income (loss)

  $365  $(19,535) $(18,749)

Effect of preferred stocka, b

   (973)  (777)  —   
             

Net loss applicable to common shares

  $(608) $(20,312) $(18,749)
             

Denominator for diluted income (loss) per common share:

    

Basic weighted-average common shares

   24,829   23,959   23,043 

Effect of dilutive convertible preferred stockb

   —     —     —   

Effect of dilutive stock optionsc

   —     —     —   
             

Adjusted weighted-average common shares

   24,829   23,959   23,043 
             

Diluted loss per common share

  $(0.02) $(0.85) $(0.81)
             

a

The amount of the accumulated dividend on the Preferred Stock increased the net loss applicable to common shares by $973,000 and $777,000 for the years ended December 31, 2006 and December 31, 2005, respectively.

b

The amount of the accumulated dividend on Preferred Stock offset the Company’s net income and resulted in a net loss applicable to common shares with a total unfavorable effect of $973,000 for the year ended December 31, 2006. The adjustment for the quarterly revaluation of the derivative liability, would have instead increased the net income applicable to common shareholders by $121,000 for the year ended December 31, 2006, and the common shares that would be issued to shareholders upon conversion of the remaining Preferred Stock and in payment of the remaining Dividend Make-Whole Payment would have increased the weighted-average common shares by 2.2 million for the year ended December 31, 2006. These adjustments were excluded from the calculation above, as they were anti-dilutive pursuant to the provisions of SFAS 128.

The amount of the accumulated dividend on Preferred Stock increased the Company’s net loss by $777,000 for the year ended December 31, 2005. The adjustment for voluntary conversions of Preferred Stock which took place during the period March 18, 2005 through December 31, 2005, and the adjustment for the quarterly revaluation of the derivative liability, would have instead increased the net loss applicable to common shareholders by $140,000 for the year ended December 31, 2005. The common shares that would be issued to shareholders upon conversion of the remaining Preferred Stock and in payment of the remaining Dividend Make-Whole Payment would have increased the weighted-average common shares by 2.0 million for the year ended December 31, 2005. These adjustments were excluded from the calculation above, as they were anti-dilutive pursuant to the provisions of SFAS 128.

c

Outstanding options to purchase the Company’s common stock that would have resulted in additional dilutive common shares of 229,000, 331,000, and 345,000 for the years ended December 31, 2006, 2005, and 2004, respectively, were excluded from the calculation above, as they were anti-dilutive pursuant to the provisions of SFAS 128.

F-32


In future periods the basic and diluted loss per common share are expected to be affected by the declaration of dividends on Preferred Stock, the conversion of Preferred Stock, fluctuations in the fair value of the Company’s common stock, and changes in the valuation of the derivative.

16. Income Taxes

Income (loss) before income taxes consists of the following (in thousands):

   2006  2005  2004 

Domestic

  $358  $(19,956) $(22,205)

Foreign

   292   (7)  439 
             

Income (loss) before income taxes

  $650  $(19,963) $(21,766)
             

 

Income tax expense (benefit) consists of the following (in thousands):

 

    
   2006  2005  2004 

Current:

    

Federal

  $         85  $(557) $(3,120)

State

   (58)  70   27 

Foreign

   (17)  123   103 
             
   10   (364)  (2,990)

Deferred:

    

Federal

  $—    $—    $—   

State

   —     —     —   

Foreign

   275   (64)  (27)
             
   275   (64)  (27)
             

Income tax expense (benefit)

  $285  $(428) $(3,017)
             

The Company’s income tax expense of $285,000 for 2006 was primarily due to the recording of deferred tax liabilities related to a foreign jurisdiction and alternative minimum tax on the Company’s taxable income for 2006 that cannot be offset by the Company’s net operating loss carryforwards, partially offset by the favorable effect of adjustments to certain state tax obligations and the favorable effect of reductions in the estimated foreign taxes on income of the Company’s wholly owned European subsidiary.

Such amounts differ from the amounts computed by applying the U.S. federal income tax rate of 34% in 2006, 2005, and 2004 to pretax income as a result of the following (in thousands):

   2006  2005  2004 

Tax expense (benefit) at statutory rate

  $       221  $(6,787) $(7,400)

Increase (reduction) in income taxes resulting from:

    

Deferred tax valuation

   (330)  6,493   5,475 

Research and development credit

   (126)  (100)  (550)

Extraterritorial income exclusion

   (49)  (54)  (54)

Foreign income taxes

   258   59            76 

Equity compensation

   175            30   —   

Entertainment expenses

   81   74   67 

Loss (Gain) on preferred stock dividend make whole payments

   41   (48)  —   

State income taxes, net of federal benefit

   3   (142)  (604)

Nontaxable interest income

   —     (10)  (27)

Other

   11   57   —   
             
  $285  $(428) $(3,017)
             

F-33


The tax effects of temporary differences which give rise to deferred tax liabilities and assets at December 31 are as follows (in thousands):

   2006  2005 

Deferred tax assets:

   

Allowance for bad debts

  $50  $36 

Property

   62   —   

Intangible assets

   335   356 

Accrued expenses

   3,327   2,356 

Loss carryforwards

   23,603   20,177 

Credit carryforwards

   5,372   5,134 

Deferred preservation costs and inventory reserves

   1,467   258 

Other

   237   11 

Less valuation allowance

   (32,978)  (26,538)
         

Net deferred tax assets

   1,475   1,790 

Deferred tax liabilities:

   

Property

   —     (608)

Intangible assets

   (574)  (499)

Prepaid items

   (441)  (422)

Accrued expenses

   (401)  (13)

Other

   (285)  (248)
         

Total gross deferred tax liabilities

   (1,701)  (1,790)
         

Total net deferred tax liabilities

  $(226) $—   
         

The Company assesses the recoverability of its deferred tax assets on an annual basis, and on an interim basis, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. Management provides a valuation allowance when, as a result of this analysis, management believes it is more likely than not that its deferred tax assets will not be realized. In assessing the recoverability of its deferred tax assets at December 31, 2006 the Company reviewed its historical operating results, including the reasons for its operating losses in prior years and uncertainties regarding projected future operating results. Based on the results of this analysis, at December 31, 2006 the Company determined that it was more likely than not that the Company’s deferred tax assets would not be realized. Therefore, as of December 31, 2006 the Company had a total of $33.0 million in valuation allowances against deferred tax assets and a net deferred tax liability of $226,000 related to taxes in a foreign jurisdiction.

As of December 31, 2006, the Company had approximately $48.5 million of U.S. federal net operating loss carryforwards that will begin to expire in the 2023 tax year and $3.1 million in research and development tax credit carryforwards that will begin to expire in 2010. Additionally, at December 31, 2006 the Company had $2.3 million in alternative minimum tax credit carryforwards that do not expire.

The realizability of the Company’s net operating losses could be limited in future periods as mandated by Internal Revenue Code Section 382.

17. Executive Insurance Plan

Pursuant to a supplemental life insurance program for certain executive officers of the Company, the Company and the executives shared in the premium payments and ownership of insurance policies on their lives. At death, policy proceeds equal to the premium contribution were due to the Company with the remaining proceeds due to the designated beneficiaries of the insured party. In 2003 the Company suspended all contributions to the plan in order to evaluate the plan in relation to Section 402(a) of the Sarbanes-Oxley Act of 2002. No contributions were made to the plan in 2005 or 2004. In 2004 the Company awarded as a bonus amounts contributed by the Company to policies for two departing executive officers that had participated in the plan. The Company’s Board of Directors terminated this plan during 2005, and awarded as a bonus the Company’s remaining interest in the plan to three executive officers that had participated in the plan. As a result the Company recorded compensation expense of approximately $253,000 and $75,000 related to this plan in 2005 and 2004, respectively.

F-34


18. Transactions with Related Parties

The Company expensed $135,000, $27,000, and $30,000 in 2006, 2005, and 2004, respectively, relating to supplies for clinical trials purchased from a company whose CFO and Senior VP is a member of the Company’s Board of Directors and a shareholder of the Company. The Company expensed $26,000 in 2006 relating to research performed by a company whose former Chief of Thoracic Surgery is a member of the Company’s Board of Directors and a shareholder of the Company. The Company recorded products and preservation services revenue of $151,000, $18,000, and $38,000 in 2006, 2005, and 2004 from a customer whose former Chief of Thoracic Surgery is a member of the Company’s Board of Directors and a shareholder of the Company.

19. Segment and Geographic Information

The Company has two reportable segments organized according to its products and services: Implantable Medical Devices and Human Tissue Preservation Services.

The Implantable Medical Devices segment includes external revenue from product sales of BioGlue and bioprosthetic devices, including stentless porcine heart valves and SynerGraft processed bovine vascular grafts. The Human Tissue Preservation Services segment includes external services revenue from preservation of cardiac, vascular, and orthopaedic allograft tissues. There are no intersegment revenues.

The primary measure of segment performance, as viewed by the Company’s management, is segment gross margin, or net external revenues less cost of products and preservation services. The Company does not segregate assets by segment, therefore, asset information is excluded from the segment disclosures below.

The following table summarizes revenues, cost of products and preservation services, and gross margins for the Company’s operating segments (in thousands):

   2006  2005  2004 

Revenue:

      

Implantable medical devices

  $41,037  $38,932  $36,637 

Human tissue preservation services

   40,078   30,307   25,676 

All othera

   196   43   71 
             
  $81,311  $69,282  $62,384 
             

Cost of products and preservation services:

      

Implantable medical devices

  $7,463  $8,065  $7,818 

Human tissue preservation services

   29,958   24,357   29,807 
             
  $37,421  $32,422  $37,625 
             

Gross margin:

      

Implantable medical devices

  $33,574  $30,867  $28,819 

Human tissue preservation services

   10,120   5,950   (4,131)

All othera

   196   43   71 
             
  $43,890  $36,860  $24,759 
             

a

All other designation includes 1) grant revenue and 2) revenues related to the licensing of the Company’s technology to a third party.

F-35


Net revenues by product for the years ended December 31, 2006, 2005, and 2004 were as follows (in thousands):

   2006  2005  2004

Products:

      

BioGlue

  $40,025  $37,985  $35,745

Bioprosthetic devices

   1,012   947   892
            

Total products

   41,037   38,932   36,637

Human tissue preservation services:

      

Cardiovascular tissue

   15,988   13,762   12,504

Vascular tissue

   16,956   11,453   10,293

Orthopaedic tissue

   7,134   5,092   2,879
            

Total preservation services

   40,078   30,307   25,676

All othera

   196   43   71
            
  $81,311  $69,282  $62,384
            

a

All other designation includes 1) grant revenue and 2) revenues related to the licensing of the Company’s technology to a third party.

Net revenues by geographic location attributed to countries based on the location of the customer for the years ended December 31, 2006, 2005, and 2004 were as follows (in thousands):

   2006  2005  2004

U.S.

  $69,467  $58,869  $53,244

International

   11,844   10,413   9,140
            

Total

  $81,311  $69,282  $62,384
            

At December 31, 2006, 2005, and 2004, over 95% of the long-lived assets of the Company were held in the U.S., where all Company manufacturing facilities and the corporate headquarters are located.

F-36


SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(in thousands, except per share data)

   First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
 

REVENUE:

     

2006

  $19,449  $20,754  $20,018  $21,090 

2005

   17,665   17,198   16,458   17,961 

2004

   15,086   15,314   16,118   15,866 

GROSS MARGIN:

     

2006

  $10,763  $11,638  $11,488  $10,001 

2005

   9,650   9,049   8,503   9,658 

2004

   4,036   5,877   6,996   7,850 

NET (LOSS) INCOME:

     

2006

  $(1,780) $217  $1,978  $(50)

2005

   (1,357)  (14,379)  (3,118)  (681)

2004

   (7,026)  (3,352)  (6,008)  (2,363)

(LOSS) INCOME PER COMMON SHARE—DILUTED:

     

2006

  $(0.08) $(0.00) $0.07  $(0.01)

2005

   (0.06)  (0.61)  (0.14)  (0.04)

2004

   (0.32)  (0.14)  (0.26)  (0.10)

F-37


SCHEDULE II

CRYOLIFE, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

Years ended December 31, 2006, 2005, and 2004

Description

  

Balance
Beginning

of Period

  Additions  Deductions  

Balance
End

of Period

Year ended December 31, 2006:

        

Allowance for doubtful accounts

  $105,000  $65,000  $40,000  $130,000

Year ended December 31, 2005:

        

Allowance for doubtful accounts

  $85,000  $57,000  $37,000  $105,000

Year ended December 31, 2004:

        

Allowance for doubtful accounts

  $65,000  $53,000  $33,000  $85,000

Deferred preservation costs

   50,000   —     50,000   —  

S-1


List of Exhibits Included

Exhibit
Number

Description

10.2(b)*

Second Amendment to the Credit Agreement, dated October 17, 2006, amends the February 8, 2005 Credit Agreement between

Wells Fargo Foothill, Inc., CryoLife, Inc., and its subsidiaries, as amended on September 27, 2005.

10.5*+Exchange and Service Agreement, dated December 15, 2006, by and between CryoLife, Inc. and Regeneration Technologies, Inc. and its affiliates RTI Donor Services, Inc. and Regeneration Technologies, Inc. – Cardiovascular.
10.9(e)*Commission Arrangement with Gerald B. Seery, Effective January 1, 2006.
10.11*Form of Key Employee Secrecy and Noncompete Agreement, by and between the Company and its Officers and Key Employees.
10.18*Description of CryoLife, Inc. Performance-Based Bonus Plan.
10.29*Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.
10.30(a)*Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.
10.30(b)*Form of Director Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 1998 Long-Term Incentive Plan.
10.31*Form of Non-Employee Directors Stock Option Agreement and Grant pursuant to the Amended and Restated Non-Employee Directors Stock Option Plan.
10.32*Form of Incentive Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.
10.33*Form of Non-Qualified Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.
10.34*Form of Restricted Stock Award Agreement and Grant pursuant to the CryoLife, Inc. 2002 Stock Incentive Plan.
10.35*Form of Non-Qualified Employee Stock Option Agreement and Grant pursuant to the CryoLife, Inc. 2004 Employee Stock Incentive Plan.
10.36*Form of Grant of Non-Qualified Stock Option to Directors.
10.37*Grant of Incentive Stock Option to Stephen G. Anderson, dated May 4, 2006.
21.1*Subsidiaries of CryoLife, Inc.
23.1*Consent of Deloitte & Touche LLP.
31.1*Certification by Steven G. Anderson pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2*Certification by D. Ashley Lee pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32*Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.

*Filed herewith.
+The Registrant has requested confidential treatment for certain portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.